bernd gottschalk, ralf kalmbach mastering automotive challenges 2007

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Publisher’s noteEvery possible effort has been made to ensure that the information contained in this book isaccurate at the time of going to press, and the publishers and authors cannot accept respon-sibility for any errors or omissions, however caused. No responsibility for loss or damageoccasioned to any person acting, or refraining from action, as a result of the material in thispublication can be accepted by the editor, the publisher or any of the authors.

First published in Great Britain and the United States in 2007 by Kogan Page Limited

Apart from any fair dealing for the purposes of research or private study, or criticism orreview, as permitted under the Copyright, Designs and Patents Act 1988, this publicationmay only be reproduced, stored or transmitted, in any form or by any means, with the priorpermission in writing of the publishers, or in the case of reprographic reproduction in accor-dance with the terms and licences issued by the CLA. Enquiries concerning reproductionoutside these terms should be sent to the publishers at the undermentioned addresses:

120 Pentonville Road 525 South 4th Street, #241London N1 9JN Philadelphia PA 19147United Kingdom USAwww.kogan-page.co.uk

© Bernd Gottschalk, Ralf Kalmbach and individual contributors, 2007

The right of Bernd Gottschalk, Ralf Kalmbach and individual contributors to be identifiedas the author of this work has been asserted by them in accordance with the Copyright,Designs and Patents Act 1988.

ISBN-10 0 7494 4575 0ISBN-13 978 0 7494 4575 1

British Library Cataloguing-in-Publication DataA CIP record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication DataMastering automotive challenges / Bernd Gottschalk, Ralf Kalmbach, [editors].

p. cm.Includes index.ISBN-13: 978-0-7494-4575-1ISBN-10: 0-7494-4575-0

1. Automobile industry and trade -- Management. I. Gottschalk, Bernd, 1943 – II. Kalmbach, Ralf.

HD9710.A2M376 2007629.222068--dc22

2006030580

Typeset by Saxon Graphics Ltd, Derby

With special thanks to the co-authors who helped in making this book: Axel Koch, DrSari Abwa, Juri Wagenleitner, Norbert Dressler and Thorsten Mattig, Roland BergerStrategy Consultants.

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Contents

Preface by Bernd Gottschalk and Ralf Kalmbach v

Part I Major challenges 1

1 The automotive industry sets the course for the global economy 3Bernd Gottschalk

2 The automotive power play moves into its next round 25Ralf Kalmbach

3 The globalization challenge – is the automotive industry raising the champions of tomorrow? 46Dr Thomas Sedran

4 The value chain challenge: networks, the strategy for success 69Marcus Berret

5 The technology challenge: progress or pitfall? 103Silvio Schindler

6 The market challenge: who will gain strategic control? 146Jürgen Reers

7 The sales and after-sales challenge: capturing value along the car lifecycle 171Dr Max Blanchet and Jacques Rade

Part II Case studies 217

8 Partnership as a model for success 219Franz Fehrenbach

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iv Contents

9 Brand differentiation on the basis of platform and module strategies 241Dr Bernd Pischetsrieder

10 New impetus for General Motors in Europe 252Carl-Peter Forster

11 How electronics is changing the automotive industry: fromcomponent suppliers to system partners 270Peter Bauer

12 The next evolutionary step for the automotive industry is just around the corner: factors for sustainable success in the interplay of OEMs and suppliers 290Siegfried Wolf

13 BlueTec: the path to the world’s cleanest diesel 314Thomas Weber

14 Bharat Forge: emerging players from emerging regions 334Babasaheb N Kalyani

Conclusion 345Ralf Kalmbach

Index 368

Preface

The automotive sector is the key industry in almost all industrializedeconomies. It is one of the driving forces behind globalization. Majormacroeconomic factors, including economic growth, employment, tech-nological progress and the pace of innovation, are all strongly influencedby the automotive industry, whose products are both produced and soldworldwide. Globalization, however, is accompanied by radical changesthat present serious challenges to automotive companies.

Production in the Eastern European and Asian growth markets isconstantly expanding, while the global footprint is increasingly deter-mined by cost efficiency. Not only traditional production sites, but alsotried and tested development and manufacturing structures are in inex-orable decline. At the same time, political developments such as EUenlargement are creating new opportunities to redesign the global foot-print, as companies seek to exploit the advantages now opening up inother locations.

Component suppliers are increasingly responsible for creating valueand providing expertise. Some already have the capability to develop andmanufacture entire vehicles, and they are making full use of their engi-neering design skills. In fact, some of these companies are visiblycatching up with the vehicle manufacturers in terms of know-how.

Partnerships between original equipment manufacturers (OEMs) nowrequire an active exchange of important vehicle modules such as theengine or the gearbox. This makes it much easier for new competitors toenter the market or reposition themselves within the market.

The automotive industry develops and produces highly complexproducts. Driven by the dynamic innovation of recent years, this new levelof complexity demands a new management approach. Without it,companies will not cope. We are also seeing important changes in

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customer behaviour, as consumers abandon their traditional car-buyinghabits. In addition to mobility criteria, customers are increasingly guidedby lifestyle choices when selecting their vehicles. And companies are alsoadjusting their product lines in response to this change.

Sales structures are also facing upheaval. With competition getting evertougher and markets ever tighter, sales, customer service and financialservices are becoming increasingly important. Retail is the face to thecustomer. It is here that the foundations are laid for brand perception, andultimately profitability. And now that the new rules under the BlockExemption Regulation are in force, auto makers must reexamine andoverhaul their retail strategies.

Manufacturers and suppliers are investing increasingly in greener tech-nologies. Manufacturers are redoubling their development efforts toimprove environmental and safety features. This is partly because theircustomers expect cleaner cars, and partly because they need to respond tolegislative initiatives by the EU or, for example, the state of California.And this trend is creating new areas of technological competition.

So far, the automotive industry has always been able to take on andovercome similar challenges. It has responded successfully to oil crises,sluggish economic growth and difficult market conditions. But the presentsituation is special: it now looks as if many different underlyingeconomic, political and ecological factors are changing simultaneously.

Most publications on the subject of automotive management deal onlywith individual aspects and questions raised by the management agenda.A wider, holistic perspective on the industry is still lacking. The aim of ourbook is to fill this gap. It is intended to provide guidance for automotivemanagers and to offer practical help for practical management by givingexamples of best practice and recommendations for action.

The first section presents a number of contributions on the centralproblems to which automotive managers must find answers. In the secondpart, top managers from major auto makers present some case studies toillustrate their strategies for tackling the challenges already outlined –strategies that have won international acclaim. The final section sums upthe key success factors for overcoming these challenges and presentsconcrete recommendations for practical implementation.

We believe this book can provide significant support in meeting thechallenges you face in the automotive industry.

Bernd GottschalkPresident OICA and VDA

andRalf Kalmbach

Roland Berger Strategy Consultants

vi Preface

Part I

Major challenges

1

2


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1

The automotive industrysets the course for the

global economyProfessor Bernd Gottschalk, President of the International

Organization of Motor Vehicle Manufacturers (OICA) and theGerman Association of the Automotive Industry (VDA)

THE GLOBAL AUTOMOTIVE INDUSTRY – THE SIXTH BIGGEST ECONOMY

The growth prospects of a national economy are largely determined by itskey industries. In recent decades, the automotive industry in many triadcountries has proven to be one of the strongest drivers of technology,growth and employment. If it were a single country’s economy, the globalautomotive industry – with total sales of around N1,900 trillion – would bethe world’s sixth largest national economy. More than 8 million people aredirectly employed in the process of manufacturing vehicles and partsalone. That equates to over 5 per cent of all people directly employed inindustrial manufacturing, and many times more than that if those indirectlyemployed in the automotive industry are included. More importantly,though, the automotive industry is now the world’s biggest innovator,investing an estimated total of just under N70 billion a year in research anddevelopment. This makes it a driver of technical progress and is the mainfactor behind the increasing technological connectivity between industrysegments. Original equipment manufacturers (OEMs) are also among thebiggest contributors to national revenue, pumping some N450 billion a year

into state coffers in 26 countries. This proves that the automotive industryhas also assumed sociopolitical responsibility, and its contribution to thefuture of our national economies is greater than that of almost any otherindustry. The car is indispensable to society, and the automotive industry isequally indispensable to the development of our communities.

GERMANY AS A BUSINESS LOCATION: A TRADITION AND A FUTURE

Germany has the world’s leading automotive industry, and not just becausethe car was invented there. The country is also a major automotiveproduction location and sales market. The automotive industry aloneaccounted for N235 billion of the manufacturing sector’s N1,300 billiontotal sales in 2005, not including the sales generated in upstream industrysegments, from plastics to steelmaking. Of Germany’s N162 billion exportsurplus in 2005, the automotive industry alone was responsible for N89billion. The external component accounted for 0.7 percentage points of the0.9 per cent ‘growth’ of GDP in 2005. This means that approximately 0.3percentage points of this rise – or a third of the previous year’s increase –would not have been possible if the automotive industry had not been sosuccessful on external markets. Moreover the automotive industry is one ofGermany’s biggest employers, providing 766,600 jobs. If the indirectworkforce employed in the automotive-related upstream and downstreamindustries is counted, the total rises to 5.3 million jobs.

The structure of Germany’s economy and industry is dependent on theautomotive sector. For this reason, the conditions for doing business inGermany have to support the automotive industry’s further success. Thereare some heartening signs of progress on this count in the wake of EUenlargement, which has increased competition between countries:

� Unit labour costs have been slashed in the last three years, mainly dueto lasting productivity gains, but also because Germany has finallystopped granting workers sizeable pay rises. As a result, the countrynow leads the field ‘only’ in absolute wage figures. This was anecessary step by unions and management, and one that will graduallyimprove Germany’s ability to compete on cost.

� At the same time, the average operating time in the German metalworking and electrical engineering industry rose from 45 hours a weekin 1989 to just under 59 hours in 2004.

4 Major challenges

� The Pforzheim 2004 wage agreement in the German automotiveindustry laid down a number of special rules. These opened the door tomore flexible solutions, longer working hours to suit individualbusiness requirements and flexible working hours, particularly in thearea of research and development.

� ‘Plant protection agreements’ between manufacturers or suppliers andtheir employee-elected representatives, designed to keep a plant alive inexchange for worker concessions, also contain provisions that representimportant steps toward regaining past levels of competitiveness.

However, we must bear in mind that these positive changes are late incoming and are being made in an environment where the countriescompeting to attract new businesses are not letting up in their attempts tobecome more competitive. That is why the right strategy and a consistentbusiness promotion policy cannot be based solely on companies’ restruc-turing efforts and the improvement of the taxation regime. Nor can itcentre only on cutting bureaucracy and regulation, improving conditionsin the labour market and lowering non-wage costs. Trade unions andcompany management must also take responsibility as the parties towage agreements. Now more than ever, wage agreements must helpmake sure that the country remains an attractive place for companies todo business.

The crucial factor – and this is a tricky aspect of the public discussionin Germany – is not only how much effort is put into correcting mistakes,liberating companies from outmoded burdens that the market is nolonger willing to bear the cost of, and making the framework for wageagreements more flexible. The key is the relative speed with which theconditions for business in Germany change compared with conditions inother countries. It is about how quickly Germany manages to staycompetitive compared with new and attractive potential business loca-tions in Eastern Europe. The latter may, of course, see their cost advan-tages erode – albeit very slowly – as wages and price levels approachthose in Western Europe. But they have correctly recognized the need tooffset the smaller gap in labour costs by redoubling their efforts to attaina more highly qualified workforce, by strengthening their R&D capac-ities, by developing their infrastructure and by improving the conditionsfor production logistics.

This is why the factor that determines Germany’s relative competitiveposition is not the next round of wage agreements alone; it is the wholepackage of moves that set the political framework. Will Germany be ableto stay one step ahead with first-rate road and transport infrastructure?Will German universities and their graduates remain some of the best in

Setting the course for the global economy 5

the world? And will manufacturers and suppliers still be able to maintainthe technological lead in the automotive market that they have achievedtogether over the past decades? It is not just the ‘automotive businessmodel’ that will decide how much of the industry’s future value is createdin Germany – a comprehensive ‘Germany business model’ is what willdetermine this.

One thing is certain: political attempts to talk Eastern Europe intoraising taxes and wages, or to label foreign investments by Germanindustry (which depends on global networks) as unpatriotic, are not likelyto protect jobs in Germany, and nor are penalties on value createdoverseas. These are actions by countries that have already admitted defeatin the battle to stay competitive. Germany has no need for them.

CAPACITIES AND NEW COMPETITORS

The pressure on Germany as a location for building cars is on the rise for anumber of reasons:

� Passenger car plants in Germany are still far from working at optimalcapacity. And production capacities in Europe will go up from 18.6million to 20 million cars by 2011, an 8 per cent rise.

� The new production sites being opened by French/Japanese andKorean OEMs in Central and Eastern Europe (with additional capac-ities in excess of 1 million cars a year) present a new challenge for thecompetitiveness of the German automotive industry, especially in thelower and mid-range price segments.

� National boundaries are becoming blurred: value chain links thatwould previously have been clearly allocated along national lines arebecoming ‘multidomestic’.

The cost competition affects the main car-producing nations of Europe inthe wake of ‘European globalization’ that has followed EU enlargementand the increase in competition it has brought between member states. Butit also affects the North American OEMs, who face enormous competitionfrom the Japanese, Koreans and Germans. In the not too distant future, thepresence of Chinese or Indian car makers and brands on the world’s othercar markets will cause competition to intensify once again, just as thepresence of German products in China or India is creating new marketopportunities for German industry.

6 Major challenges

As one of the world’s biggest industries, with production of its globalbrands accounting for some 22 per cent of worldwide production, theGerman automotive industry is an example of a growth industry in a stateof flux. The 1992/93 crisis was more a crisis of R&D and productionprocesses, which resulted in full-scale reengineering that saw the focusfirmly placed on the core manufacturing activities, and processes reor-ganized. Today, though, we are rather faced with a process of adjustmentcaused by globalization. However – and this does not make the strategicanswers easier – the pressure to adjust to globalization is accompanied bya number of other challenges. While these may not be new, they do requiremany different answers for many different companies.

CHINA AND INDIA – THE NEW GROWTHCHAMPIONS

In 2005, battles over prices and terms were fierce and companies saw theirmarket shares fluctuate rapidly. This proved how difficult it is to predicthow the emerging markets are going to develop. It also showed how fastpreviously successful strategies need to be modified under massive timepressure, and huge efficiency-boosting programmes need to be imple-mented even in a market like China, which is supposed to offer the benefitof rising volumes.

German car makers and suppliers were among the first to do business inChina, long before the market took off. However, the structural shifts inthe Chinese market, the rapid differentiation of market segments, and ofcourse the attractiveness of new providers, have caused German OEMs’share of the Chinese market to decline in recent years. This was absolutelyto be expected, as a large share of a sheltered market can never be main-tained to the same extent after the market has been opened up. ButGerman OEMs are rising to the new challenge by renewing their productrange, adjusting their structures in procurement and sales, and organizingtheir cooperation with their Chinese partners and their German partnerson the supply side.

The Indian market has reached a volume of more than 1 million cars,putting it on a par with Mexico and Russia. The number of commercialvehicles sold in India already exceeds that sold in Turkey and Russia.German OEMs entered the Indian market at a later stage than they didChina, but their Indian business is now ramping up nicely.


Another way in which India differs is perhaps still more important. Atpresent, China is the scene of a major fight for the Chinese domesticmarket, though vehicles and parts are not yet being exported from thecountry in any magnitude. India, on the other hand, is becoming a realand relevant global player, particularly in the supply industry. India isalready delivering just-in-sequence parts to German car makers, andJapanese and Korean cars are being manufactured on the subcontinentand shipped to the European Union. These examples illustrate India’sconsistent global orientation and development of export capabilities,and show that India is now a player in the global automotive business.This is driven by consistent orientation toward competitive prices and aremarkable R&D focus, now visible in areas other than India’s global ITsupremacy. As a result, and quicker than many had expected, India is notmerely in the process of becoming an important and fast-growingmarket, it is exploiting the opportunities that the global market and themarkets in Europe, including Germany, offer Indian manufacturers andsuppliers. And it is doing this more conspicuously than any other Asiangrowth market.

The German automotive industry has taken up the challenge offered bythe Indian market. In Skoda, a company from a German conglomeratealready holds a leading position in the Indian market’s premium segment,and BMW is now joining the likes of DaimlerChrysler in the top segment.More will follow. MAN’s entry in the Indian commercial vehicles marketis an indication of the growth of the market for technically complex, state-of-the-art vehicles.

German companies and their partners account for 15 per cent of thesales generated in the parts industry in India. What is more, these firmssaw sales jump by 20 per cent last year, which testifies to the opportunitiesthe country holds for the German automotive supply trade. And theseopportunities will be seized; this much is proven by the contacts betweensmall and medium-sized enterprises in particular, which are set tointensify greatly in the coming years.

Nevertheless, a systematic rise in exports from China can be expectedin the next few years. The eleventh five-year plan sees the automotiveindustry not merely as a key industry, but as a growing automotive exportnation. Furthermore, China can be expected to make ambitious plans withregard to modern, environmentally friendly engine concepts. This willturn China and India into global players to be reckoned with – and chal-lengers to established competitors.

8 Major challenges

EXPORT STRATEGY AND GLOBAL BUSINESSLOCATION STRATEGY:

THE GERMAN AUTOMOTIVE INDUSTRY ISFORGING ITS OWN PATH

Of the passenger cars produced in Germany, 71 per cent are destined forthe export market. In the past 10 years, exports from the German auto-motive industry have risen 54 per cent. This sounds like the traditionalmodel of ‘Germany, the export champion’, but it is only one aspect of thefull picture. In future, the picture will be marked more by global presence,operating production plants directly in foreign countries with a close rela-tionship to research and development activities at home.

� The number of German OEMs’ foreign production sites and licenseeshas increased by more than 250 per cent since the early 1990s, to over2,000 today.

� German companies alone supply 600 production sites in WesternEurope, 300 sites in Central and Eastern Europe and 300 throughoutNAFTA.

� The extent of their presence in China and the rest of Asia has alsoskyrocketed in recent years.

This development is not without consequence for the value chainstructure. Today, 40 per cent of the value created from exports is a directresult of purchased materials and services that were previously imported,primarily from low-cost countries. This import volume – and this is thetelling figure – has risen by 143 per cent in the last 10 years. Engine andautomotive parts imports also grew by 9 per cent last year (worth someN32 billion), more than double the growth of exports, which saw a mere 4per cent rise. This shows that the importance of internationally purchasedmaterials and services is still growing; and it will continue to grow, thelonger it takes for the conditions for business in Germany to improve. Or,to put it in positive terms, there will be no automatic process of deindustri-alization in Germany as long as it can actively improve its standing in thekey competitiveness factors of labour costs, working hours, flexibility andnon-wage costs.

While 130,000 new jobs have been created in the German automotiveindustry since the mid-1990s, it is important to point out that 160,000 newjobs have been created at its manufacturers and suppliers in EasternEurope. This, in turn, has created a global manufacturing network, which,


by combining the advantages of Germany with the low costs of EasternEurope in particular, has brought product costs down to competitive levels.

By moving early, consistently and quickly into Central and EasternEurope, German companies have given themselves an advantage overtheir global competition. Without it, they would have lost their ability tocompete on cost. In the automotive industry more than any other, the ideathat new jobs in low-wage countries destroy jobs in Germany iscompletely unfounded.

However, the restructuring programmes present no prospect ofcontinuing the upward trend in employment in Germany to bring quickproductivity gains. But it is worth noting that although the manufacturingsector has seen 15 per cent of its jobs disappear in the past decade, theGerman automotive industry has proved to be a ‘job machine’. At thesame time, productivity has improved dramatically thanks to investmentsin technology and capital stock. Sales per hour worked have risen by 66per cent. The rise in production in the automotive industry in the pastdecade is not a result of rationalization investments, but is rather due to thefact that sales have doubled.

THE GERMAN MARKET

The weak market of the past five years is a key factor in Germany’srelative importance as an automotive market, and indeed production inthis country coming under pressure. Although 2004 and 2005 saw the firstsmall signs of growth returning, the danger has not passed. This growthwas generated exclusively by growth in the commercial customersegment. No fundamental U-turn can be seen yet in the private carowner’s decision to continue saving rather than buy a new car, resulting inthe further ageing of the vehicle population. German OEMs’ and theirsuppliers’ success in boosting sales and revenues in Germany cantherefore not be attributed to higher volumes. Rather, it is a result of thehigher value of each car: in other words the result of qualitative growth.The premium segment, the greater numbers of diesel cars and the higherstandards of driving comfort and safety have led to substantial valuegrowth in the German market. This growth has exceeded that indicated bythe low-volume development.

The commercial vehicle segment did see genuine growth in the Germanmarket, though. The export-driven investment dynamic in Germany’sindustry has also hit commercial vehicles in their capacity as capital goods.For the second year in a row, Germany’s commercial vehicle market is

10 Major challenges

seeing a significant upturn. In the last two years, new vehicle numbers haverisen by 20 per cent. Supported by the rise in demand for low-pollutantvehicles and the launch of digital tachographs and new vehicle concepts,85,500 vehicles over 6 tonnes were sold in Germany in 2005. In the inter-national markets, German car makers achieved a new export record in2005, selling 115,800 vehicles over 6 tonnes. Thanks to their strong inter-national business and the continuing positive sales balance in Germany,manufacturers of vehicles over 6 tonnes saw their production in 2005increase by a further 5 per cent, to a record volume of 168,800 vehicles.This took them past the 400,000 mark for the first time, with a total of407,500 commercial vehicles manufactured in Germany. Internationally,too, German OEMs produced more commercial vehicles than ever before.

Trans-European logistics and the need for modern commercial vehiclesthat meet the latest emissions standards even before they become law areforcing commercial fleet operators to renew their fleets. Germancommercial vehicle manufacturers have been extremely successfulbecause they meet these growing demands and focus rigorously on tech-nology leadership.

THE GERMAN SUPPLY INDUSTRY: A FAVOURITE IN THE COMPETITION

A consistent focus on technology leadership is also what made theGerman supply industry strong. Big corporations and small firms alike areamong the global technology leaders of the day. An export ratio of 42 percent and a high worldwide presence through production sites and jointventures underscore this point, with German suppliers engaging in almost1,800 business arrangements across 74 countries.

With sales of N68 billion in 2005, Germany’s supply industry is theworld’s third biggest, behind Japan and the United States. In the past 10years, it has proven to be a growth engine: since 1994, revenues havegrown by more than 8 per cent a year on average. And 90,000 newworkers (net) have been taken on. Over the last 10 years, the supplyindustry has, first and foremost, helped the automotive industry beat thedownward trend seen in other industries in terms of employment figures.The number of jobs in the industry increased by 31 per cent between 1995and 2005, rising approximately 3 per cent a year.

So the doubling of the scale of the industry’s foreign involvementclearly did not have a negative impact on employment at home. On the


contrary, it strengthened the production sites in Germany by making themmore competitive. This is the only explanation for the exceptional rise inexport sales. In Germany, too, the industry’s revenues grew much fasterthan their customers’ revenues.

Besides the substantial improvements in vehicle equipment, particu-larly the improvements in safety, comfort and environmental friendliness,this can be traced back to the suppliers’ greater integration in valuecreation processes. Since 1994, German OEMs have reduced their verticalintegration levels by 10 percentage points thanks to outsourcing. Theyhave transferred one third of their original value creation onto theirsuppliers, and the supply industry’s share of value creation in Germanynow exceeds 75 per cent.

The process of outsourcing is expected to continue on a global scale inthe years to come. This promises more good growth opportunities for theGerman supply industry, both in the growth markets and in Germany.Despite the sacrifices that may have to be made in the short term, theGerman supply industry is expected to be a stabilizing factor in the devel-opment of the economy in the medium to long term. It will also be a driverof technological innovation.

Still, the press is full of stories of industry consolidation trends. WithOEMs having already gone through this process, the supply industryoffers considerable scope for consolidation, as it is characterized by a highproportion of small and medium-sized enterprises, international as well asnational. The liberalization of markets and the possibility of linking upinternational activities reinforce these tendencies. This is exemplified bythe increasing involvement of international capital funds, even withsmaller suppliers. Nevertheless, there has not been a significant reductionin the number of supplier companies.

Nor does this seem surprising in view of the industry’s attractiveness.Impressive growth rates and technological progress, particularly in thefield of electronics, tend to attract companies in adjacent industries. Noindustry has such a varied range of materials and products as the auto-motive supply industry. From steel to software, almost all branches ofindustry are involved in the manufacturing of a car. The industry is diverse– what binds it together are the challenges it faces from competitors,customers and the economic framework.

For the German supply industry, sustaining technology leadership is thekey factor in competition. This alone is what will allow production tocontinue in a high-wage country that is also marked by a high tax burdenon businesses. Another major challenge is the fierce competition in theautomotive markets, which sees customers faced with rising cost pressure,and higher material costs squeezing revenues. The equity ratio in German

12 Major challenges

companies is low by international comparison, which makes the positioneven more difficult. Investments in new products and process improve-ments, as well as spending on research and development, are high andneed to be financed. Ultimately, suppliers and car makers need to worktogether to maintain their competitive position.

A TESTING TIME FOR SUCCESS STRATEGIES

It is true that ‘end of days’ prophecies, like those issued by the Club ofRome, or ‘winner and loser’ predictions, as developed by James PWomack, Daniel T Jones and Daniel Ross, the authors of The Machinethat Changed the World (Rawson, New York, 1990), have been overtakenby reality. But it is equally true that the changes set in motion by global-ization necessitate a different economic and political framework, call intoquestion conventional location structures, and make new business modelsimperative for automotive companies.

That is why so many strategies, decisions on the location of productionsites, and historic supply and production structures in the German auto-motive industry are currently being put to the test. And that is why diversecost-cutting and restructuring programmes are ultimately the answer tothe challenges that globalization is throwing at us. Regardless of whichstrategy is best for each individual company, there are certain clear devel-opment lines that will shape the coming years:

� Productivity at traditional production sites in the home market must beincreased to safeguard the basis of Germany as a business location –still attractive overall – and at least soften the trend in productionoffshoring to low-wage countries. The actions to increase efficiencythat companies are now implementing minimize the difference in unitcosts that sets us apart from alternative business locations when takentogether with all cost factors. In spite of the strengths of Germany’s carmanufacturing sites – outstanding technological performance andflexibility combined with a direct line to the innovation process – thereis only justification for bringing large production volumes to thecountry if car makers cut production costs and make working hoursmore flexible. These are difficult processes and some of them arepainful, particularly for the workforce in Germany. Interestingly, theso-called traditional automotive plants – some of which have their ownin-house wage agreements but all of which certainly have elements farin excess of national wage rates – are under growing pressure from


modern, leaner plants and efficient working models, such as 5000 x5000 at Volkswagen.

The adjustment processes currently under way prove that theindustry is being proactive and optimizing its organization in the faceof much tougher global competition. Some companies are alreadyproving that they can regain market share and achieve strongerrevenues after such a process of restructuring. But what is also clear isthat foreign manufacturing is also on the increase, and it will grow at afaster rate than domestic production.

The German automotive industry will increase its global presence.In 2005, German OEMs were already producing more cars worldwidethan ever before, with 10.7 million vehicles built in 23 countries. Thatwas 3 per cent more than the previous year. The passenger car segmentbeat its previous year’s record by 2 per cent, taking the total number ofcars produced to 9.6 million. Commercial vehicle production leapt 16per cent to a total of more than 1.1 million. Including Chrysler,German OEMs increased their 2005 production volume by 3 per centto 13.45 million automobiles. This means that more than one in five(21 per cent) of all vehicles manufactured in the world were built in theproduction halls of German automotive corporations. The automotiveindustry’s strategy is basically a network strategy: thanks to its strongposition in the German home market, it is strong on exports. Thisprotects additional jobs, while simultaneously safeguarding businessthrough a network of production sites in low-wage countries. Theseenable car makers to gain access to local markets and achieve a betterproduction cost level. Improved competitiveness now sees as much as40 per cent of the export value originating from supplies shipped fromlow-wage countries to traditional German production sites.

� German OEMs will defend their role as world champions in diesel.The Germans hold 51 per cent of the Western European market fordiesel vehicles, which now accounts for 49.5 per cent of the total auto-motive market. This means that German brands are responsible for 63per cent of the market’s 4.1 million growth in vehicle numbers over thepast 10 years. Accounting for 47.4 per cent of passenger carproduction in Germany, the diesel has also dramatically increased therelevance of Germany as a production location. Today, it is theGermans’key technological advantage over their competitors, particu-larly as demand is growing in this sector.

The fact that German car makers now account for 82 per cent of themarket for vehicles with diesel particulate filters in Germany under-lines the contribution to future competitiveness made by cleanexhaust emissions technologies. Selective catalytic reduction (SCR)

14 Major challenges

has already prepared the ground for the next technological leap in thereduction of nitrogen oxides (NOx), which can help the diesel enginemake a decisive breakthrough in other markets, primarily the UnitedStates. Clean diesel is the key buzzword that will boost the presenceof this technology in emerging markets that do not yet have a sizeablediesel segment, such as China. The growth market of India alreadyhas a high share of diesel vehicles, and this represents an opportunitythat will be exploited by German OEMs. Some of our globalcompetitors may be putting their efforts into other engine tech-nologies. Admittedly, they will gain a positive image as early starters,but this is because they do not have the same technological potentialwith the diesel, on either the manufacturing or the supply side. SCRtechnology combined with the additive Ad Blue® (VDA’s Ad Bluetrademark is now registered worldwide as a fuel as well as the relatedvehicle technology) or the Bluetec technology show that the Germanautomotive industry was also the first to tackle the tricky subject ofremoving NOx from diesel emissions, the last remaining environ-mental questionmark.

� The global market for premium products has grown at double the paceof the global automotive market since 2000, registering 10 per centgrowth. A market potential of almost 10 million vehicles worldwideseems realistic for 2010. This growth is primarily down to the everwider distribution of models with premium features outside the tradi-tional domain of premium and executive cars as well as sports cars.Premium features are increasingly being offered successfully in thecompact and sport utility vehicle (SUV) classes. And growth is set tocontinue in the years to come.

� No other industry sector invests as much in new technologies as theGerman automotive industry. It has invested N16 billion and employs86,000 people in R&D, including one-fifth of all the engineersworking in German industry. Most importantly, the German auto-motive industry occupies the top spot in the number of automotivepatents. Giving up this position, or letting cost, quality and tech-nology leadership do battle against each other, is unthinkable.Although electronics have been particularly helpful in developingsafety features – ABS, ESP, airbag, collision avoidance radar, nightvision and so on – doing away with them would lead directly tosimpler technology. This would make it easier to achieve stableprocesses, which is a basic requirement for quality. However, it wouldmeet neither the heightened demands of the customers nor the generalframework in high-wage Germany. Treading this path would alreadybe very difficult for the German, and even for the European or North


American automotive industry. In the future, it would be completelyimpossible because of the new competitors from China or India: wewould find ourselves stuck in a no-escape situation as the Asiansplayed out their cost advantage against us. The German OEMs’premium position requires them to be a step ahead of the market ontechnology while at the same time ensuring good quality andacceptable cost levels.

� The homogeneous economic cycles in the automotive industry that wesaw in the 1970s and 1980s are more or less a thing of the past. Theyhave been replaced by individual economic cycles for each OEM,created by model cycles or innovations. Consequently, 30 to 50 percent of 2005’s market demand in Germany was created by newvehicles and engines. So new models are one thing; concept inno-vation is a decisive step further. Concept innovation will continue tohold a significant and probably growing relevance for the Germanautomotive industry in the future. Social change – be it in the agestructure, the population or consumer habits – has fragmented or indi-vidualized the product offering and differentiated the product range.While there were 340 models available in Germany in 1990, by 2005the number was already up to 510. The supermini segment is growing,largely driven by the wider range of models. The compact class is alsogaining weight, while the traditional midsize category is shrinkingslightly. The biggest winners are SUVs, 4×4s, innovative spatialconcepts, four-seater convertibles, new models straddling the linebetween passenger car and commercial vehicle, and the new cross-utility category. While niche vehicles made up just over 15 per cent ofall new cars five years ago, they now account for almost 27 per cent.

The upshot of this development is that the complexity that carmakers eliminated by reducing their vertical integration back in1992/93 has now returned, with all of its consequences for highercosts, especially overheads. Manufacturers must ask themselves howthey can continue to exploit economies of scale in view of the growingvariety of niche vehicles. Another method of keeping costs undercontrol in the face of growing complexity and differentiated nicheproducts, besides the intelligent mix of production locationsmentioned above, is so-called modular, platform or unit assemblystrategy. Such a strategy enables smaller, yet still economical, batchsizes to be produced, although this does necessitate a higher degree offlexibility. Intelligent outsourcing and the integration of variouspartners – all the way through to the logistics stage – are a suitable wayof keeping complexity down and at the same time handling productdiversity, international procurement and site management.

16 Major challenges

� The market for cars costing less than N10,000 is growing in Europe,and even more so globally. Many of the world’s markets, like India,will increasingly focus on vehicles around the N5,000 and perhapseven the N2,000 mark. These categories are only feasible on the costside if considerably more value is generated in low-wage countries.However, even in Germany, this market segment is more than 50 percent served by German products – although some are made in Brazil –so there are clearly considerable opportunities to be had here. Behindthis development lies the fundamental question whether Germanymight only be able to manufacture premium cars in the future, perhapsbeing forced to give up the production of volume vehicles.

� In the automobile business, finance and leasing are unavoidable toenable large swathes of the population to fulfil their desire to havetheir own car. Cheap financing deals are driving the new growthmarkets in particular. Around 75 per cent of new cars registered inGermany are bought through leasing or financing, with half of thedeals arranged by automotive banks. This activates an important areaof growth and employment potential in this key industry, which isbasing more and more of its future business on automobile-relatedservices. In addition to the 770,000 people directly employed by carmakers and automotive suppliers in Germany, a further 18,000 work atfinancial subsidiaries in Germany, 11,000 of them at manufacturers’own banks and leasing companies.

Financial services have thus become a significant source of revenue.Even when automobile sales have been slow, automotive banks have stillenjoyed good growth rates. Automotive banks and leasing firms havemore than doubled their total assets in the past 10 years, and they nowtotal almost N80 billion. The total assets of Germany’s five automotivebanks and leasing firms alone exceeded N63 billion in 2004. OEMs’ownbanks account for more than 70 per cent of financial services sales, with85 per cent of that amount coming from the leasing business. Carinsurance, the third largest segment in the insurance industry, representsa further pillar of automotive financial services, with annual sales inexcess of N22 billion. Insurance brokerage by car dealers now accountsfor about 30 per cent of policies taken out – a figure that continues to rise.

Car-related services are one of the most important trends to havebeen recognized by the German automotive industry early on. Thegrowing separation of car ownership and car usage is another. 76,000people were registered with car-sharing organizations in 2005, theirnumbers rising by more than 10 per cent over the previous year. Thismarket is growing disproportionately fast, although for the time beingit remains a small part of the total market.


THE POLITICAL FRAMEWORK: CARS 21

The success of a strategy is not decided by the market alone. In developedeconomies, the automobile is now the most regulated product of all. Inemerging markets, the degree of regulation is growing faster than most ofthe markets are. In the past, it was largely the self-regulation and creativityof engineers that kept giving the development of the automobile a tech-nology push at ever shorter intervals. Nowadays, progress is determinedby the targets politicians set for the industry in the belief that these targetswill reduce fuel consumption or cut emissions faster.

New environmental and safety regulations can be out of sync with thecar industry’s innovation cycles, and sometimes they are even mutuallyexclusive. The latter can occur when, say, regulators require additionalsafety features on the one hand while insisting on weight reductions andlower CO2 emissions on the other. In the fiercely European markets, thisgives car makers a major disadvantage over those in countries with muchlower levels of competition, such as Japan or Korea. In these countries,companies sometimes even receive government support.

The CARS 21 process, spearheaded by European Commission Vice-President Günter Verheugen, clears the way for the global competi-tiveness of an industry to become one of the key criteria determining thedirection and speed of new EU regulations. The CARS 21 group wasmade up of high-ranking representatives from the EuropeanCommission, Member State ministries, the European Parliament, theautomotive and the oil industry, as well as other non-governmentalorganizations (NGOs) such as consumer protection organizations. Theresult is a series of joint recommendations aimed at improving theEuropean automotive industry’s ability to compete on a global scale, butalso supporting further improvements in road safety and lessening theimpact of the car on our environment. CARS 21 defined an integratedapproach that will be used to bring the diverging requirements, many ofwhich are only ever seen together when they reach the developer’s desk,into line with each other. Their consequences will then be assessedduring the legislative procedure itself.

The group’s recommendations are intended specifically to improve thelegislation governing new vehicle registration by simplifying theprocesses involved. This includes, for example, integrating the ECEregulations into the body of European law, which at the moment containsalmost identical EU directives that are meant to run in parallel. The planis to replace 38 EU directives with ECE regulations. In addition to this,vehicle and parts manufacturers will be allowed to self-test their

18 Major challenges

products’ compliance with certain regulations, and the use of ‘virtual’testing (such as computer simulation) will also be permitted. Work oninternational harmonization of vehicle regulations will be intensified,with key markets and growth markets being more closely involved in theharmonization. Furthermore, the comprehensive approach also meansthat transitional rules based on product lifecycles will be defined forwhen new regulations come into force or existing ones are modified.Moreover, the impact of regulations already in force will be reviewedafter a certain period has elapsed.

The group also discussed a number of ways of reducing exhaust emis-sions for light vehicles (Euro 5) and heavy vehicles (Euro 6). Commissionproposals are planned for both of these regulations, and will be presentedin 2006 (in the case of light vehicles) and 2007.

The integrated approach is particularly thorough when it comes toefforts to reduce CO2 emissions, with all stakeholders being addressed(the automotive and the oil industry, automobile workshops, as well asdrivers and the relevant authorities). Besides engineering the vehiclesthemselves to be more efficient, the introduction of information systemssuch as gear change indicators and consumption meters, and even trainingin eco-driving, are among the solutions being considered. Biofuels(mainly admixed with regular fuels) will play a key role, with specialemphasis being placed on what are known as second-generation biofuels(for instance BTL, biomass-to-liquid), since these are expected to providethe greatest potential at acceptable cost levels.

Hence, the recommendations of the CARS 21 group provide a newbasis for optimizing the political environment in Europe. They aim tosafeguard the competitiveness of Europe’s automotive industry andsimultaneously bring further improvements in road safety and environ-mental protection by applying a comprehensive and integrated approach.The CARS 21 road map of upcoming legislation to be initiated by theEuropean Union in the automotive sphere brings the chance of greaterreliability and predictability on the part of European lawmakers. Itremains to be seen how the European Union performs on this count in reallegislative action.

WELCOME TRENDS IN BETTER VEHICLE SAFETY

The automotive industry has been successful at constantly improving theautomobile’s safety and impact on the environment. In spite of increasingtraffic on our roads, the number of deaths in road traffic accidents since


1991 has more than halved, with just under 5,400 people killed inGermany in 2005, and the downward trend is continuing.

However, there is increasing evidence that the most importantpotential for further improvements in vehicle safety can only be realizedif partners work together and share the workload intelligently. That iswhy CARS 21 advocates an integrated approach in this area too,involving not just vehicle technology but the road infrastructure and roadusers as well. The Commission will present suggestions for thesuccessive introduction of vehicle regulations. These include things likethe electronic stability programme (ESP), safety belt warning indicator,brake assistant, as well as direct and indirect visibility, ISOFIX childrestraint systems and daytime running lamps. In terms of road infra-structure, it will recommend a monitoring and evaluation system that willhelp all parts of the road system adjust to the more exacting standards. Itwill even include the criminal prosecution of those driving under theinfluence of alcohol or drugs, or speeding, especially since these areamong the main causes of accidents. And finally, positive opportunitieslike the e-Call system should be used to make a big improvement toemergency services callouts. It is of the utmost importance that theinjured are treated within the first hour of an accident.

In the past, German automobile manufacturers and suppliers werepioneers when it came to road safety, and road safety has since become akey means of differentiation, proof of technology leadership and thereforeof a brand’s position. Efforts to improve safety will therefore continue tobe one of the Germans’ strategic priorities.

THE GERMAN AUTOMOTIVE INDUSTRY SETSITS SIGHTS ON BIOFUELS

Keeping our society supplied with energy is one of the greatest chal-lenges for the future. We have no choice but to reduce our dependency onoil. This is also part of the industry’s responsibility toward climateprotection, nationally and globally. At the same time, making sure thatresources remain available and affordable in the long term is one of thekeys to remaining competitive. Being less dependent on energy suppliesand thus achieving greater supply security coupled with price stabilityare therefore long-term, primary goals. Innovation is the industry’s alter-native to regulation, and to prices rising to new thresholds and increasingthe burden on drivers.

20 Major challenges

German OEMs are not about to put all their eggs in one basket in thehope that it is the right one. What they will adopt is a more varied approach:

� greater use of first-generation biofuels, such as biodiesel andbioethanol, and admixtures of up to 10 per cent (that is, going furtherthan the European Union’s target of 5.75 per cent by 2010);

� introducing alternative, second-generation biomass fuels (BTL);� further efficiency improvements in highly efficient clean diesel and

gasoline engines;� customized application of all hybrid technology options;� using natural gas as a fuel;� developing and introducing alternative engine systems;� considering hydrogen as a long-term prospect.

The Germans are not starting from scratch. On the contrary, increasinglyefficient engines have been reducing our dependency on oil for years. Theaverage fuel consumption of a new German car is 25 per cent lower than itwas in 1990 and a massive 40 per cent lower than in 1970. Half of all newcars made by German OEMs in 2004 run on less than 6.5 litres per 100kilometres. More than 250 models of German cars consume less than 6.5litres, with 48 models even managing to keep their fuel consumptionunder 5 litres. These cars have played a big part in the continuousreduction of CO2 emissions from road traffic since 1999. By 2004, CO2emissions were 15 million tonnes lower than in 1999. This makes roadtransport the sector with the highest CO2 reduction over this period.Furthermore, exhaust emissions were also cut by up to 97 per cent.

Hybrid technology represents another focus for R&D activities in thecoming years. The German automotive industry sees the hybrid beingused primarily in areas where it can play to its advantages. Where thereare rapid changes in driving speed, such as driving in city traffic, a hybridengine can save fuel and cut emissions. The American and Japanesemarkets are leading the way in terms of hybrid vehicles. By 2015, hybridvehicles are expected to account for about 15 per cent of cars on the roadin the United States. In Europe, the hybrid is competing against a strongdiesel market, which is making its breakthrough much more difficult.

German car makers are already working in partnership with each otherand in collaboration with global partners in this area. And it is not true thatthey are late in starting, or that they have the wrong strategic priorities.The United States, for example, has two to three diesel cars to everyhybrid vehicle. Therefore, manufacturers that have a lower than averagepresence in the diesel segment should be the ones asking themselves ifthey missed the boat.


In the long term, environmentally friendly hydrogen from renewablesources is set to become the main energy carrier. In the short to mediumterm, the German automotive industry is focusing on combining a wholerange of different technologies. Moving away from oil involves more thanthe cars themselves; it entails looking at the fuels that power them. TheGerman automotive industry is therefore pushing the use of alternative,renewable sources of fuel energy.

Admixtures with 10 per cent biofuel can cut the amount of CO2 releasedinto the atmosphere by the cars on the road today by more than 15g/km.For this reason, the German automotive industry has already begungetting cars ready to take admixtures of up to 10 per cent. So the Germancar industry has clearly started doing its homework for the future. Fuelstandards will need to see further development in parallel.

The German automotive industry will continue to offer vehicles thatcan run on even higher admixtures. German car makers are world leadersin the production of bioethanol vehicles. With their so-called flex fuelvehicles, they have cornered almost 70 per cent of the market in Brazil,the world’s biggest bioethanol market. Some OEMs are even selling thesecars in Europe, including Germany.

To leverage this potential for the benefit of our climate, the task now isto tackle the challenges on the raw materials side:

� Biofuels already account for 3 per cent of fuels in Germany today. By2020, the German agricultural sector alone will, with the right focusand suitable production methods, be able to substitute as much as 10per cent of the fossil fuels it uses, with the figure rising to over 15 percent by 2030. Translated into carbon dioxide emissions, this equates topotential savings of over 10 million tons for Germany alone by 2030.

� European Commission calculations indicate that almost 10 per cent ofthe fuel used in the European Union can already be substituted bybiomass. In 2040, the figure should exceed 35 per cent.

� The global market holds even greater potential for substitution, with alarger quantity of usable space and more favourable climatic condi-tions in many cases.

Cutting CO2 emissions by 80 to 90 per cent is a realistic proposition forthe fuels of the future. Key factors are the profitability of energy crops, theintensity with which raw materials and their waste products are used, andthe conversion rate – that is, the efficiency with which fuel is producedfrom biomass. In this respect, synthetic BTL fuels and fuels made fromligno-cellulose fibres have shown the best results. The return per hectarecan be optimized through the cultivation of energy crops. These fuels are

22 Major challenges

also capable of processing a wide range of biomass products. Moreover,the biomass is converted into fuel at an effective rate – especially sinceevery part of the plant can be used.

However, technological suitability and a good environmental balanceare not enough. New fuels must also be economically feasible. Somebiofuels can already be produced at prices similar to those of fossil fuels.In most cases and particularly in Europe, biofuels can only be producedcompetitively because they qualify for tax exemption, but almost allbiofuels display the potential to reach the price level of fossil fuels.

Ethanol is already at least as cheap as comparable gasoline, if youconsider the global market price. Biodiesel too can already be produced ata competitive price if it is made from waste fats that would otherwise haveto be disposed of at considerable cost.

The raw materials market is of key significance for biofuels. As thematerials used to make biofuels cannot exclusively be bought in Germany,the raw materials market should be considered both nationally and inter-nationally. It is important to successively prepare the global business ofselling raw materials to meet this new demand. The growing number ofpotential raw materials suppliers represents a considerable advantage,from farmers in Germany to agricultural markets the world over. Longterm, this provides a broader basis for our energy supplies and enables usto be less affected by political crises or OPEC-style monopolies.

Finally, the right legal and, even more importantly, fiscal frameworkmust be in place. The focus must be placed firmly on a reliable policy ofpromoting biofuels – one which is based on a clear set of criteria such asthe potential for reducing CO2. Trying to manage the transition to biofuelswith compulsory conversion rates and forced admixture ratios will notresult in success and is likely to lead to higher prices for drivers. Taxationbased on CO2 efficiency and sustainability criteria is the best approach –this will put the market entry requirements in place for the second gener-ation of biofuels, and prevent funds being misallocated in the future topromote biofuels that have no impact on CO2 levels.

THE GERMAN AUTOMOTIVE INDUSTRY:EQUIPPED FOR THE FUTURE

Lasting success in the automotive industry will depend on comprehensiveand highly complex integration processes. Hence, automotive companiesand suppliers are facing enormous challenges because they must:


� integrate the requirements of the markets in completely differentstages of the development process and different structures;

� manage a global production and supply network that can no longer beorganized along the lines of home and export markets;

� integrate the requirement for ever greater levels of innovation in thesupply chain and ensure reliable quality of the highest level;

� keep core competencies in Germany, from R&D to production, whilealso optimizing efficiency levels;

� develop several technologies at once to cut emissions andconsumption levels and provide greater security in terms of high-lighting synergies and overlaps, as well as show when incompatible orcompeting targets are being pursued;

� take society and the political world’s changing expectations of theproduct development process into account from an early stage, andconversely, work proactively to shape the general framework.

If companies nowadays are looking at their established organizationalstructures and processes and adjusting them faster than they did in thepast, this is primarily because they know they need to stand up to therequirements of the future. The German automotive industry is on the balland is, in spite of all the challenges, well equipped to tackle the intensi-fying international competition.

24 Major challenges

2

The automotive powerplay moves into its next

roundRalf Kalmbach, Partner, Roland Berger Strategy Consultants

Automotive engineering is one of the key industries in virtually alldeveloped economies. It has a profound impact on economic output,employment, technological development and a raft of other factors thatare critical to a nation’s economic performance. It is also one of thedriving forces behind globalization. Car makers have long been marketingand selling their products around the world. Accordingly, the industry’sworldwide networking strengths and global presence are way ahead ofthose in other sectors.

Automobiles are very special products to the individual too. Highlycomplex in terms of the technology they embody, they meet the basichuman need for mobility, which in turn is a prerequisite for the intensiveexchange of goods. On another level, cars are also status symbols thatawaken desires and make dreams come true. They are (or can be) both anexpression and an integral part of their owner’s lifestyle. They are alsoexpensive: in many cases, they are one of the single largest items theirowner will ever buy.

The tremendous importance of the automotive industry both todeveloped economies and to the individuals who drive cars makes it veryprone to change. A given market’s propensity to invest may shift.Purchasers’ preferences may vacillate. Operating costs may rise.Governments may introduce new laws that alter the playing field. Allthese factors – and many more besides – have a direct impact on thecomplex business systems and value chains that characterize the auto-motive industry. This fact alone presents a significant challenge to an

25

industry that is so capital-intensive and whose tributary systems mean thatit can only respond slowly to change. The corollary is that the automotiveindustry can only operate successfully in a stable context that is conduciveto reliable planning.

Over many decades, far-reaching changes have repeatedly shaken andchallenged the industry: the oil crisis in the 1970s; Japanese superiority inthe early 1990s, which posed a massive threat to European and Americanmanufacturers; the severe political and economic crisis in South Americathat abruptly put a line through everyone’s astronomical sales expecta-tions – the list could go on indefinitely.

Today, however, a new dimension of challenge is emerging. Fundamentalpolitical and economic changes are coinciding, and automotive companiesare feeling the full force of both shifts. Traditional structures and ‘rules ofthe game’ no longer apply. The entire global industry is in transition.

The automotive power play, in other words, has moved into its nextround. Managers in the industry now have but a brief window of oppor-tunity – one or two years at most – in which to lay the foundations for theircompanies’ future survival and success. It is time for them to find strategicanswers, and to focus business systems on the new challenges that lieahead. First, however, they must grasp the nature of the changes that arecurrently buffeting their industry.

GLOBAL SHIFTS IN AUTOMOTIVE MARKETS

Just a few years ago, the car industry knew for sure which markets inter-ested it. The United States, Japan and Western Europe – the ‘triadmarkets’ – stood at the centre of all strategies and plans mapped out byvehicle manufacturers and their component suppliers. Indeed, a 70 percent share of global vehicle sales in 2000 certainly justified this keenfocus. New markets such as South America had frequently aroused greatexpectations in the past, yet such expectations seldom translated intosuccessful strategies. Many manufacturers had to learn this lesson thehard way. Some, in fact, are still suffering from the legacy of misplacedinvestments back in those heady days.

The triad markets have been stagnating for years, however. And this isforcing the automotive industry to realign its strategic thrusts and concen-trate more on up-and-coming countries and economic areas: China, India,the Asian ‘tiger economies’, and Eastern Europe. All these markets havegrown rapidly in recent years and are the only ones that will, in future,continue to post significant growth rates (Figure 2.1).

26 Major challenges

There is a catch, however. Auto makers and component suppliers who turntheir attention to these new markets will only meet with success if they donot see them as new sales regions only. Each one of these markets has itsown highly individual economic structures, sociodemographic layers andcustomer needs. The example of the four tiger economies – Indonesia,Malaysia, the Philippines and Thailand – powerfully underscores thiscontention (Figure 2.2). Which vehicle types people most prefer variesconsiderably. Pick-ups are the most popular purchase in Thailand, againstSUVs/minivans in Indonesia and the Philippines, for example. Also, theimport quota in three of these countries (Malaysia is the only exception) isupward of 80 per cent (Figures 2.3 and 2.4).

China, India, Indonesia, Malaysia, Philippines, Thailand, Eastern Europe

CAGR+12.5%

CAGR+13.5%

Western Europe, United States, Japan(the ‘triad’)

CAGR+1.8%

CAGR-0.6%

2000 2004 2010E 2000 2004 2010E

6.510.8

19.2

39.9 39.042.3

Figure 2.1 Vehicle sales in selected regions, 2000–10 (millions of units)Sources: JD Power, Roland Berger Strategy Consultants

The next round 27

Population2004 (million)

GNP per capita,2004 (US$)

GNP growth2004 (%)

Cars per 1,000 inhabitants

Indonesia 242 5.1 15970

Malaysia 24 7.0 2074,601

Philippines 87 6.1 9975

2,490Thailand 65 6.2 39

Figure 2.2 Macroeconomic data in selected East Asian countriesSources: CIA World Factbook, Deutsche Bank Research

It follows that viable strategies for these markets necessitate specific productsfor specific countries or regions, suitable sales channels, and appropriatecommunication with the buyers. It is vital to accurately anticipate bothdemand structures and the factors that influence purchase decisions, and thento supply products tailored to precisely these needs. In Asia’s upwardlymobile economies, vehicles do not normally need quite so much elaborate

17 65 9Indonesia

7 13 41Malaysia

12 53 6Philippines

6

37 1

2

23 5

38

1

Thailand 232 26 1

Pickups SUV minivans Subcompact Mid-range Luxury Other

Figure 2.3 Market segmentation by vehicle type (per cent)Source: JD Power

28 Major challenges

5Thailand 47

2

84

Philippines

1

44981

Malaysia 63122

22

54187 2

JapanJapan USAUSA EuropeEurope KoreaKorea Local/otherLocal/other

Indonesia

Figure 2.4 Market share by country/region of origin (per cent)Source: JD Power

technology. The technology they do have must not be obsolete, however.Vehicles sold here must be functional and have a modern design. Behind this‘profile’ is the standard buying pattern that low disposable income stilldictates in all emerging markets: people want ‘value for money’. Accordingly,entry-level segments in particular are experiencing above-average growth,while concurrently exerting heavy cost pressure on manufacturers.

This trend is most evident in China. In the years ahead, the low-endsegments will continue to enjoy above-average growth. Vehicles in theclasses A00 through A will therefore corner 70 per cent of the market by2010 (Figure 2.5).

China’s home-grown car industry is enviably positioned in this segment. Ithas made stunningly fast progress in the past few years, energeticallyasserting its place on the Chinese market – and also laying plans to exportthe fruit of its labours. Collaboration with established auto makers isenabling Chinese original equipment manufacturers (OEMs) to develop andbuild attractive products in short order. The reason is that they have recourseto the same external links in the value chain (component suppliers, devel-opment service providers etc) as foreign OEMs. As a rule, they can also tapsubstantial cost advantages by sourcing and manufacturing locally. This

The next round 29

26%

24%

5%

2010E2000

12%

1%

2004

17%

39%

12%

11%

1%

15%

22%

8%

34%

611 25%

2,640

7%

40%

1%

4,490CAGR+21%

A00

A0

A

B

C

D

Figure 2.5 Sales of passenger cars in China, 2000–10 (millions of units)Sources: CAAM; Roland Berger Strategy Consultants

configuration enables them to sell attractive products at prices well belowthe cost of their imported counterparts (Figure 2.6).

Production of the Chery QQ in China provides a good illustration of howvehicles can be positioned very successfully, and at the same time, triggerprice erosion across entire market segments. This subcompact model sellsfor less than the equivalent of €3,000 and was, in the first quarter of 2005,the best-selling car in China. Volkswagen’s cheapest model right now –the Brazilian-built Fox – costs more than twice as much, at the equivalentof €7,000.

European and American OEMs’ hopes of selling their products inthese new growth markets and absorbing excess capacity will thereforecome to nothing. The problem of overcapacity in their traditionalmarkets must be dealt with at source. Meanwhile, new business modelsare needed for the new markets (Figure 2.7). Without local devel-opment and production, foreign OEMs will not be able to gain afoothold.

The battle for the emerging markets is therefore still wide open.Established auto makers will only score lasting successes in thesemarkets if they can formulate and systematically apply suitably adjustedbusiness models (in terms of brand positioning, product portfolios,pricing strategies and delivery systems). The winners in this race will befew in number.

1) Assumption: Production costs = 100% if local content = 0

79%

2001

84%

20032002

74%

55%

45%

65%

Production costs1

Local content

Figure 2.6 Correlation between production costs and local contentSource: Roland Berger Strategy Consultants

30 Major challenges

THE SHIFTING BALANCE OF POWER IN THEAUTOMOTIVE INDUSTRY

New markets are not the only factor that is forcing the automotive industryto adapt. The balance of power within the industry itself is likewise expe-riencing a shift of seismic proportions:

� New suppliers are rewriting the rules of the game.� Traditional customer segments are dissolving.� As the level of outsourcing increases, car makers and component

suppliers are becoming more and more heavily dependent on eachother.

� External conditions and constraints (a more environmentally awarepublic, the limited availability of fossil fuels, more pronouncedpolitical interventions in the form of laws, taxes and tolls) are forcingthe industry to address new issues.

384

439

504

1,209

4,814

0 1,000 2,000 3,000 4,000 5,000

Asia and Pacific

North America

South America

Eastern Europe

EU

Capacity growth, 2004–10(000 units)

Capacity utilization in 2004 (%)

0

78

78

79

63

55

20 40 60 80 100

The next round 31

Figure 2.7 Global capacity growth through 2010 and capacityutilization in 2004Sources: PricewaterhouseCoopers, Roland Berger Strategy Consultants

New suppliers are rewriting the rules of the game

Whenever the automotive industry engages in trials of strength, it alwaysdoes so on a global scale. In the 1980s, ‘cheap’ Japanese cars posed anexistential threat to the American and European incumbents. In the mid-1990s, highly successful Korean manufacturers brought a new challengeinto the fray, whose market share rose to 4 per cent in North America and3 per cent in Western Europe in a few short years.

In building up production capacity in their target markets (NorthAmerica, Western and Eastern Europe, China and India), these companieshave already done the groundwork for further expansion. They are thusgradually establishing themselves as local vendors. In many cases, theirsuperior business models or production systems enable them to supplyvehicles whose prices and quality are more attractive. The challenge tohome-grown car makers’ market share is obvious. As if that were notenough, these new upstarts are actually defining new success factors in themarkets they target. Local players thus have no choice but to face up totheir new rivals and accept that the rules of competition have changed.

Toyota, for example, is currently rolling up market after market and iswell on the way to becoming the world’s leading auto maker. EvenGeneral Motors (GM) and Ford are being cast in the Japanese giant’sshadow in the United States (see Figure 2.8).

32 Major challenges

-15

-10

-5

0

5

10

15

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000

Avg. market growth: -0.4%

Avg. sales: 500,000

VW

Honda

Ford GM

DaimlerChrysler

ToyotaNissan

Car sales in Q1 2005

Growth rateQ1 2005 against Q1 2004

Figure 2.8 Passenger car sales and growth rates for the largest OEMsin the United States, first quarter 2005Source: Roland Berger Strategy Consultants

Hyundai is likewise in the process of becoming one of the leadingmanufacturers in North America and Europe. Over the next few years, it isforecast to achieve 6 and 10 per cent growth respectively in these twomarkets. The company has a very powerful presence in China inparticular. Here, its market share has shot up from zero to 8 per cent in justthree years. Anticipated average annual growth of 40 per cent in the nextthree years will give Hyundai an even firmer foothold.

A number of other vendors are already on the starting blocks. It is onlya matter of time before Chinese OEMs begin to penetrate the triad marketswith knock-down prices, and before consumers begin to regard vehiclesfrom India or the ASEAN countries as viable, economical alternatives.

Traditional customer segments are dissolving

Only a few years ago, marketing experts in the car industry could stilldelimit their target groups fairly clearly on the basis of social strata andpurchasing power. Today, customer behaviour no longer fits into neat littlepatterns and decision modes, and is therefore much more difficult topredict. Traditional segmentation patterns are simply no longer valid.

Two interlocking developments have precipitated the erosion of tradi-tional customer segments. One is buyers’ growing penchant for ‘smartshopping’. The other is the increasing supply of niche products frommanufacturers.

Smart shopping has become a discipline that shapes every purchase abuyer makes. That naturally also applies to such major investments as thepurchase of a car. Smart shoppers trawl multiple sources to retrievecopious information about products and market prices. Ever keen tosecure the best value for money, they tend to shrug off the influence ofpast purchasing decisions. This undermines customer loyalty, forcingvendors constantly to create attractive new offerings if they want existingcustomers to buy successor models too.

In the fierce battle for new market segments and niches, auto makershave no choice but to pursue creative new strategies in order to set theirvehicle ranges apart. To retain existing customers and win new ones, theythus market all kinds of niche products that hold out the promise of‘personal’ mobility and lifestyle solutions. These offerings go far beyondregular, off-the-peg products and are designed to lure buyers irrespectiveof status and purchasing power. Examples of such successful nicheproducts include the BMW Mini and the Toyota Prius.

Even so, it is becoming ever more difficult to predict whether and towhat extent buyers will accept new products. Not every purchase decision

The next round 33

can be explained in rational terms. An automobile is, after all, still a veryemotionally charged product whose benefit is perceived to far surpass themere guarantee of mobility. Seen from this angle, every planned productlaunch is in effect a gamble whose probability of success or failure can atbest only be guessed. And big gambles inherently go hand in hand withhigh risks.

The growing economic implications of these risks pose a seriousproblem to car makers. With competition merciless and profit marginsoften razor-thin, one or two flops can often spell doom for the company.Without the financial backing of DaimlerChrysler, the Smart subsidiary,for instance, would long since have suffered this fate.

The crucial issue is therefore the ability to devise visionary brand andproduct strategies for highly unpredictable markets. Solid planning struc-tures and processes are a must, obviously. To anticipate the trends that willreally take off and translate these into just the right products neverthelessalso demands a good nose, the ability to take bold entrepreneurial deci-sions – and a decent helping of good fortune.

The key focus should, however, always be on clear answers to twoquestions. What exactly does the brand stand for? And what attributes canand do existing and potential buyers want to associate with the brand?This issue has often been neglected in the past. Jaguar, for example, learntthe painful lesson that ‘British luxury’ cannot simply be mapped onto thevolume segment, even if the brand itself rightly belongs in the premiumsegment. Conversely, the VW Phaeton shows how hard it can be and howlong it can take to gain a foothold in new premium segments that breakwith brand tradition. Interestingly, customers evidently perceive that theVW Touareg – itself an expensive, luxurious sport utility vehicle (SUV) –is more authentic and fits better with the brand. Although the Phaeton andTouareg share a lot of the same technology, it is the latter that is scoringimpressive sales successes.

True, there are no patent recipes. Even so, formulating a successfulbrand and product portfolio strategy remains the pivotal challenge to carmakers today.

Car makers and component suppliers are becomingever more interdependent

Specialization in the automotive industry goes back a long way. In today’sheavily integrated and tightly networked value chains, car makers naturallystill bear responsibility for development and production. A good 70 percent of product value is added by external component suppliers, however.

34 Major challenges

Relentless pressure to cut costs and innovate in this industry will driveup the proportion of outsourced value further still. By focusing on theirspecific core competencies, specialized component suppliers can improvequality and achieve scale effects that benefit the entire value chain.

This compulsion to specialize throws up a series of strategic questionsto which auto makers must again find clear and consistent answers:

� What does the brand stand for?� What technological unique selling points (USPs) does the brand

demand?� What systems, modules and components are needed to realize these

USPs?� Which links in the value chain must be handled in-house?� Which component suppliers and partners can take care of the other

links?� How should collaboration with component suppliers and partners be

designed?

This pronounced shift in the value chain has, however, already triggeredextensive consolidation in the component supply market. In terms of size,global footprint, skills and innovative strengths, many of today’scomponent suppliers certainly rank as equals with the car makers theyserve. In many cases, they dominate certain systems, functions and tech-nologies to such an extent that OEMs have no choice but to live with theresultant dependencies (see Figures 2.9 and 2.10).

The next round 35

2002 2005 2010

30–40%

60–70%Value contributed by component suppliers/ service providers

Value contributed by OEMs

25–35%

65–75%

25–30%

70–80%

Vehicle production 57 m 64 m 77 m

Figure 2.9 Trends in the automotive production value chain, 2002–10Source: Roland Berger Strategy Consultants

If anything, auto makers will in future have to give even greater consider-ation to component suppliers than in the past. Complementing their corecompetencies in development and production, OEMs will also have toconcentrate heavily on forging strategic partnerships and designing effi-cient collaborative processes and structures. Success will, by definition,become a collaborative achievement.

Tighter conditions and constraints impose limits – and create opportunities

The future of personal mobility will not be shaped first and foremost byfaster or more powerful vehicles. Social and environmental issues willinstead be the determining factors. Traffic density and pollution havealready reached or exceeded critical thresholds in many places (see Figure2.11). Innovative solutions such as London’s city-centre toll zone bearwitness to governments’ attempts to prevent private transport infrastruc-tures from collapsing altogether. Other large cities and conurbations willfollow suit.

Political regulation takes effect via the ratification of prescribedpollution thresholds and safety standards, via taxation and via prohibi-tions. At the same time, consumers too are fuelling demand for moreeconomical, environment-friendly cars. This bottom-up trend is thereforelikewise obliging automotive firms to adopt a greener stance.

32,75727,852

25,01722,811

21,998 21,46218,020 18,934 18,409

17,084

DensoBosch Delphi Johnson Control

Magna -stone

Michelin LearBridge Aisin Seiki

Note: Currencies are translated at the value dates for the financial statements in each financial year.

Good-year

Figure 2.10 The 10 largest automotive component suppliers, 2005/06(sales in US$ millions)Source: Bloomberg, company information

36 Major challenges

The industry has long since accepted such political influence.Accordingly, traditional selling points such as performance, design andprice are increasingly being complemented by environmental and safetyaspects. Today’s key innovations revolve around the need to optimize fuelconsumption, reduce harmful emissions and improve vehicle safety.

The ever greater traffic density, and in particular the higher volume oftraffic in major conurbations, nevertheless often more than offset anypositive effect from such innovations. Further norms, prescriptions andregulations are therefore bound to follow. The recent EU directive onparticulate matter is only one example.

The automotive industry will accept this development too. Indeed, itwill have to throw its weight behind the initiative. After all, the industryitself benefits from regular statutory decrees that oblige drivers to fork outfor new features if they want to avoid stiff penalties relating to obsoletecar technology. In a similar vein, safety and environmental issues providecar makers with new ways to set themselves apart through innovation, andthereby to strategically reposition their brands. Thanks to its Prius model,Toyota, for instance, has successfully cultivated an image as an envi-ronment-conscious brand. Rivals worldwide have been forced to respondto this astute move. Peugeot achieved a comparable effect by quickly andsystematically introducing diesel particle filters.

CO HC HC + NOx NOxCOCO HCHC HC + NOxHC + NOx NOxNOx

Emissionlimits

100%

80%

60%

40%

20%

0%

1975 1985 1995 2005

EURO 4 limits

Petrol, LPG, natural gasHC 0.10NOx 0.08CO 1.00

DieselDiesel NOx 0.25HC + NOx 0.30CO 0.50Partikel 0.025

In g/km(CO = carbon monoxide; HC = hydrocarbon; NOx= nitrogen oxide)

Figure 2.11 Trend in vehicle emissions in Europe, 1975–2005Sources: Volkswagen, VDA website

The next round 37

THE WINNER TAKES IT ALL

Such upheavals bring fundamental change to whole industries. Not allcompanies handle or, in particular anticipate, the corresponding opportunitiesand threats with the same measure of success. Few are able to adapt to changedconditions and bring their business systems into line with new constraints.

Current developments will bring lasting change to the automotiveindustry. There will be winners and losers. Some companies will lose orhave to relinquish their independence. Others will grow faster than ever,and above all profitably. The gap between ‘good’ and ‘bad’ will widen.Mediocre firms – and this goes for auto makers and component suppliersalike – will be the first to hit the wall (see Figure 2.12).

The process of concentration in the automotive industry will continue.New players, especially those with roots in emerging markets, may takethe field in the short term. In the medium term, however, they too willexperience the workings of global market mechanisms that are even nowseparating the men from the boys.

The example of China

The Chinese car industry presents a fine study of the early stages in thisdevelopment. Issued in 2005, the new Chinese automobile directive will

38 Major challenges

0

10

20

30

40

50

60

50 (1950)

30 (1980)

13 (2000)

0

10,000

20,000

30,000

40,000

50,000

30,000 (1988)

8,000 (1998) 5,600 (2000)2,800 (2010)

OEMs Automotive component suppliers

1950 20101980 2000 1950 20101980 20001950 20101980 2000

Figure 2.12 Number of independent OEMs and independent automotivecomponent suppliers, 1950–2010Source:Automobilproduktion

considerably speed up the pace of market concentration. Small, local OEMswill no longer be competitive under the new provisions. They will either beabsorbed by larger indigenous companies that are able to compete in theinternational arena, or they will be forced out of the game. Merger activitywill increase – witness SAIC’s acquisition of China National AutomotiveIndustry Corporation and the current talks between Hafei and Changhe.

Global OEMs will play a part in driving this development. Rather thango under in the wave of consolidation, they will reassess whether existingpartnerships will help them to survive and remain competitive. Wherenecessary, they will have to revector their collaborative activities.

Consolidation in the industry will probably leave four or maybe five bigplayers that dominate the market. Hundreds of smaller firms will notsurvive. The same goes for other ‘new’ markets such as India and theASEAN countries, where just a handful of companies will likewise rule theroost. These winners will not necessarily be today’s incumbents, however.Some new players have the potential to overtake their less agile prede-cessors and outmanoeuvre them at their own game and on their home turf.

This story reminds us of how the dinosaurs died out, albeit with onecrucial difference; back then, the smaller, more nimble mammals survived.By contrast, the global auto business requires companies to achieve acertain critical mass if they are to operate profitably. Only large companiescan exploit the economies of scale, fully utilize their production capacity,build up expensive, ubiquitous sales and service networks, and deliver thevolume needed to keep them running. The ability to combine size andagility will therefore be decisive in the battle for survival.

A comparison of Toyota and GM underscores the point. Toyota hasalready risen to second slot in the worldwide automotive business and isgiving GM a hard race for pole position. Though both groups are of a similarsize, the discrepancy in terms of performance could not be more striking.While GM is fighting to stay alive, Toyota is smashing record after record.

For all its size, GM right now looks ill-placed to survive in the face offierce global competition. Company pensions and other pension commit-ments add US $1600 to the cost of every vehicle that rolls off itsproduction lines. Following mistakes in model policy, GM cannot evensell its cars on its home (US) market without conceding heavy discounts,and not even this sales strategy is paying off: in 2004, the company soldonly 50,000 more vehicles than in the preceding year. Its market share inthe United States is dropping toward 20 per cent. Margins are dwindlingand cashflow is negative. As things stand, the Detroit-based giant cannotcompete with the Koreans on price, with the Japanese on quality, or withthe Europeans on technological performance.

The next round 39

Toyota, however, has managed to position itself as the quality and envi-ronmental technology leader. It is selling cars that customers want to buy.It is also growing profitably: In 2004, volume sales jumped 10.5 per centyear on year, while sales revenues were up 7.3 per cent. Another plant isslated for construction in the United States in the near future in order toaccommodate growing demand in this market (see Figure 2.13).

Top performers and low performers

Toyota may be a classic example of a successful company, but it is by nomeans the only one. Many car makers and component suppliers areevidently succeeding in their attempts to establish and refine businesssystems that keep them prospering in the long run. Other companies arefalling at precisely this hurdle (see Figures 2.14 and 2.15).

What makes the difference between top performers and lowperformers? What do the former have in common? What are the obvioussuccess factors? Which business systems are superior? Which need to berevamped if companies are not to drift into oblivion?

40 Major challenges

Year founded 1908 1937Year founded 1908 1937

Employees in 2004 (000) 321 260Employees in 2004 (000) 321 260

Vehicles sold in 2004 (million) 8.1 6.7Vehicles sold in 2004 (million) 8.1 6.7

Sales in 2004/2005 (US$ billion)1 1622 1653Sales in 2004/2005 (US$ billion)1 1622 1653

EBT 2004/2005 (US$ billion)1 -6.62 15.13EBT 2004/2005 (US$ billion)1 -6.62 15.13

Market cap. at June 15, 2005 (US$ billion) 20.3 128.9Market cap. at June 15, 2005 (US$ billion) 20.3 128.9

Rating in June 2005 (S&P) Junk bond AAARating in June 2005 (S&P) Junk bond AAA

GM Toyota

Number of brands 2005 13 5(Chevrolet, Pontiac, Buick, Cadillac, GMC, Saturn, Hummer, Saab, Holden, Opel, Vauxhall, Daewoo, Isuzu)

(Lexus, Toyota, Hino, Daihatsu, Scion)

Number of brands 2005 13 5(Chevrolet, Pontiac, Buick, Cadillac, GMC, Saturn, Hummer, Saab, Holden, Opel, Vauxhall, Daewoo, Isuzu)

(Lexus, Toyota, Hino, Daihatsu, Scion)

1) Financial years end December 31, 2004 (GM) and March 31, 2005 (Toyota)2) Automotive and other operations3) Non-financial services business

Figure 2.13 Comparative view of GM and ToyotaSources: Company data, Bloomberg, Roland Berger Strategy Consultants

Suzuki

-15%

-10%

-5%

0%

5%

10%

15%

20%

-5% 0% 5% 10% 15% 20%

CAGR sales, 2000–04

Avg EBIT margin, 2000–04

PorscheHyundai

NissanHonda

Ford

DaimlerChrysler

GMBMW

Kia

Avg: 4.6%

Avg: 4.5%

MazdaToyota

Peugeot

RenaultVW

Mitsubishi

Fiat

Figure 2.14 Sales and profits at selected OEMs, 2000–04Sources: Bloomberg, Roland Berger Strategy Consultants

The next round 41

Δ ROCE,2000–04(%)

ROCE, 2004 (%)

Avg.: 10.8%

Avg.: 0.5%

Top performers

29%

Low performers

38%

Figure 2.15 Change in return on capital employed (ROCE), 2000–04and 2004, at the largest component suppliersSources: Bloomberg, Roland Berger Strategy Consultants

The top performers’ success factorsIn a large number of projects, Roland Berger has been able to identifycertain features that are common to all top performers:

� in-depth customer knowledge;� a clear vision and clear goals;� a long-term perspective;� a strong focus on customer loyalty;� consistent delivery on the promise of value for money in the low price

and premium price segments;� consistently high quality;� a global presence but a regional orientation;� an entrepreneurial spirit.

We have already singled out Toyota as a fine example of a topperformer. BMW too belongs in the same bracket. Ever since theGerman car maker got rid of Rover, it has consistently posted earningsbefore interest and tax (EBIT) of over 8 per cent. Sales revenues haverisen 15 per cent since 2001, while volume sales of group-ownedbrands have leapt 33 per cent.

BMW’s key strengths are its ability to innovate and its successfulpremium brand strategy. The company covers every premium segment,from the compact class to luxury sedans, and nets high margins across theboard. The BMW brand has become synonymous with something special– an achievement reflected in its vehicle strategies. Dynamism, agility, thejoy of driving, exceptional design and technology on the highest level areBMW’s typical values. And customers believe them. For years, thecompany has ranked top in the ADAC AutoMarxX ratings on drivingattributes and design.

BMW’s vision and goals are determined by a sharp focus on thepremium segment. The longevity of its goals and decisions is underpinnedabove all by the company’s shareholder structure: 47 per cent of BMW’sstock is family-owned. The company remains rigorously committed to thedemands of its customers, who expect a great deal in terms of technology,quality and safety. Target groups are analysed very precisely and productsare tailored specifically to them. (Occasional exceptions, such as theiDrive system, only confirm this rule.) BMW customers’ satisfactionexpresses itself in above-average loyalty, as evidenced once again by CapGemini’s Car Online Study in 2005.

42 Major challenges

The problems of low performersThe low performers have a hard time activating these levers of success.Many of them fall at the same hurdles:

� failure to identify fundamental trends;� failure to redesign business systems (too little or too late);� no long-term corporate strategy;� a lack of vision;� a focus on short-term profitability;� no distinctive profile;� failure to deliver value for money;� inconsistent brand management;� a lack of entrepreneurial courage;� no early-warning systems.

DaimlerChrysler, Fiat, Ford, GM, Mitsubishi and Volkswagen all figurebelow-average stock market performance. These companies’ recenthistory clearly shows where the problems lie.

DaimlerChrysler’s global strategy has not worked. The merger withChrysler and its acquisitions in Asia have destroyed value instead ofcreating it. Expensive corrective action has been and still is necessary as aresult. Since the merger with Chrysler, the value of the company hasplunged by 60 per cent.

Fiat has been struggling with quality, brand and image problems foryears. Compared with other market players, its dealer network also under-performs. The group has been spilling red ink since 2002. Rumours of atakeover by Chinese OEMs are doing the rounds in the press.

Ford is straining under three main burdens: the spin-off of Visteon,unimaginative models (especially in the United States) and the unprof-itability of Jaguar. The factories that Visteon handed back to Ford in 2005are generating added costs of some US $2 billion. And although cars soldin the United States are subsidized to the tune of around US $3,500 onaverage, market share is continuing to shrink. PAG subsidiary Jaguarreceived an injection of US $750 million in 2004, and more is still needed.Jaguar is not scheduled to break even until 2007. Ford’s market capital-ization has sunk to just US $20.6 billion, and Standard & Poor’s hasdowngraded its stock to junk bond status.

The brands in the GM group do not have a clear enough profile, either incustomers’perception nor in the way the group itself demarcates its brands.Vehicles whose appearance and content is very similar give customers littleincentive to buy. Recently, GM’s share of the US market slid to 25 per cent.

The next round 43

While the other Japanese manufacturers have occupied niche positionsin Europe, Mitsubishi has tried to build an image as a volume provider.Since 1998, the company’s sales volume in Western Europe has fallen byaround 28 per cent. Over the same period, the sales of the four other majorJapanese OEMs have grown by 14 per cent.

Volkswagen was too slow to move into forward-looking nichesegments. Until recently, the company had no SUVs (only multi-purposevehicles, MPVs) and no attractive soft-tops in its portfolio. In China, VWhas lost ground because it had no solution that was agile and flexibleenough to accommodate local developments. Once other Western andJapanese OEMs had flooded the Chinese market with new models, thesuccessful but aging Santana was no longer able to defend its once-impressive market share. In 2005, only 17 per cent of all new vehicles onthe streets of China bore the VW logo – against 46 per cent in 2000.

Success factors for component suppliersMost of the success factors discussed above apply to both vehiclemanufacturers and component suppliers. In a 2004 study entitledPatterns of Success for Automotive Component Suppliers, RolandBerger investigated the requirements that specifically concern thecomponent supply industry. Top and low performers were identified onthe basis of their return on capital employed (ROCE) for the years 1997to 2002. Their strategic orientation was also examined. The study foundthat successful component suppliers differ from the others in fivespecific areas:

� Company size: the largest companies succeed thanks to economies ofscale and their powerful negotiating position. The smallest succeed byoccupying niche positions.

� Product portfolio: on average, the top performers account for 90 percent of sales revenues with just one product group.

� Customer portfolio: on average, the top component suppliers earn 66per cent of revenues from their top three customers, against 45 per centfor the low performers.

� Research and development spending: successful component suppliersinvest 70 per cent more in R&D than low performers.

� Vertical integration: successful component suppliers add more valuein-house (see Figure 2.16).

The question is, how can these success factors be condensed into aframework that can provide clear orientation to managers in the auto-

44 Major challenges

motive industry? Answering this question and the questions outlinedbelow is the purpose of this book.

Part I outlines the main challenges to which industry managers and theircompanies must find answers today:

� The globalization challenge – is the automotive industry raisingtomorrow’s winners?

� The value chain challenge – networks: the strategy for success.� The technology challenge – progress or pitfall?� The market challenge – who will gain strategic control?� The social challenge – increasing social and political acceptance of the

automobile.

In the case studies featured in Part II, top managers of leading auto makersdescribe how they are rising to these challenges, what problems have to besurmounted, and what opportunities are opening up.

Successful component suppliers

Less successful component suppliers

1111 Company size

4444 R&D spending

5555 Vertical integration

22 Product portfolio

3333 Customer portfolio

Sales< US$ 0.5 bn

Sales< US$ 5 bn

Sales> US$ 0.5 bn

Low(< 2% of sales)

Medium(2–4% of sales)

High(> 4% of sales)

Low Medium High

Focused Diversified

Focused Diversified

Sales< US$ 0.5 bn

Sales< US$ 5 bn

Sales> US$ 0.5 bn

Low(< 2% of sales)

Medium(2–4% of sales)

High(> 4% of sales)

Low Medium High

Focused Diversified

Focused Diversified

Figure 2.16 Key areas in which top-performing component suppliersdiffer from low performersSource: Roland Berger Strategy Consultants

The next round 45

3

The globalizationchallenge – is theautomotive industryraising the champions of tomorrow?Dr Thomas Sedran, Partner, Roland Berger Strategy Consultants

General Motors (GM), Ford and Chrysler have lost more than 15percentage points of their North American market share since the early1980s. It has gone primarily to Toyota and other Japanese originalequipment manufacturers (OEMs), but also to the Koreans. Apparently,even in their home market, the ‘big three’of yesteryear are putting up littleopposition to the Japanese invasion, as evident in their continued loss ofmarket share. Even in Europe, Asian brands have passed the 17 per centmark in terms of market share.

Now Chinese and Indian manufacturers such as Geely and Tata havedeclared their intention to conquer the world’s key automotive markets.On the supplier side, new competitors are springing up in emergingmarkets as well. They are growing at incredible speed through jointventures and acquisitions. Buying the latest technologies, they are goingup against established vendors and snapping up orders.

Is the automotive industry raising the champions of tomorrow as glob-alization progresses? Who will emerge triumphant out of the globalizationbattle – only those who buy and drive the cars? What are the key chal-lenges established suppliers and newcomers face as a result of global-ization, and how can both groups master them?

46

GLOBALIZATION IN CHANGING TIMES

Although globalization has taken on a growing importance in recentyears, the topic is as old as the Industrial Revolution when it comes todeveloping new sales, production and sourcing markets. The British EastIndia Company, which acquired the exclusive right to trade between theCape of Good Hope and the Strait of Magellan on 31 December 1600, is agood example. Despite – or perhaps because of – the fact that executingthis right necessitated sometimes lengthy and fierce conflicts with othercolonial powers, the East India Company evolved into a key source ofwealth and power for the British Empire in the centuries that followed.Some of the effects of this can still be felt today. Similarly, the global-ization activities of the Venice of the 17th and 18th centuries contributedsignificantly to the city’s prosperity and power.

THE AUTOMOTIVE INDUSTRY –TRADITIONALLY A GLOBAL INDUSTRY

With the exception of its very earliest days at the end of the 19th century,the automotive industry has been a global industry almost from the start.The pioneers of globalization were GM (see Figure 3.1) and Ford, whichestablished distribution companies in numerous countries in the early 20thcentury. In the 1920s and 1930s they set up or bought production sites inone country after another across Europe and Asia to be better able to servethese ‘remote’ sales markets. This globalization was driven by three keymotives that still apply today:

� developing sales potential in growing markets;� taking full advantage of lower wages and factor costs;� leveraging the high fixed costs in vehicle R&D and production.

Ford, GM and Chrysler’s global presence gave them access to competitiveadvantages. By the mid-1960s they dominated 52 per cent of the worldmarket, with their plants manufacturing around 10 million vehicles intotal. However, at the time, the vast majority of the automotive demand –more than 90 per cent – stemmed from North America and WesternEurope. As demand for vehicles grew in Japan, Korea, Brazil, China andother countries, the regional focus shifted enormously. Today, Japan andthe new sales markets make up more than 35 per cent of the world market,

The globalization challenge 47

and this tendency is likely to rise considering the growth rates beingobserved in China, India, Russia and the ASEAN countries.

Moreover, Figure 3.2 highlights the growing amount of networkingin the automotive industry across the regions. While just 8.7 per cent ofthe worldwide demand was handled cross-regionally in the mid-1960s,the figure exceeds 15 per cent today. As excess capacities grow inChina and Eastern Europe, this rate will continue to increase in theyears to come.

The Japanese and Koreans conquer North America and Europe

With the increasing demand, particularly in Asia, the balance of power inthe global automotive industry has shifted massively in recent decades.The biggest winners were the Japanese and Korean OEMs. This devel-opment was bolstered by the recession of the early 1980s, when Toyotaand other Japanese auto makers acquired many new customers outsidetheir home markets thanks to attractively priced, high-quality and low-consumption vehicles.

48 Major challenges

• GM Export Company established to handle sales outside the United States 1912

• Manila branch established dedicated to Far East marketing (relocated to Shanghai in 1922)

1920

• Chevrolet production site opened in Copenhagen to supply Scandinavian, Eastern and Western European markets

1924

• Vauxhall Motors Ltd, England, acquired• General Motors do

1925

• Additional sales branches opened in Europe

• Subsidiary in South Africa established • Five Australian production plants built

1926

• Plants in Berlin, Germany and Osaka, Japan, built1927

• First car plant in India opened 1928

• Adam Opel AG acquired1929

• GM Overseas Operations (GMOO) established to coordinate production and marketing activities outside of North America

1930

Figure 3.1 General Motors globalization milestones 1912–30Source: General Motors

North America – an easy gameEstablished car makers did not have any competitive offerings ready inthese segments, specifically in North America, and opted instead tobypass the issue by focusing on larger vehicle segments (primarilypickups, sport utility vehicles (SUVs) and vans), which at the timedelivered excellent margins and substantial growth. The strategic impor-tance of these portfolio gaps then – and now – is shown in the devel-opment of market share over the past 10 years. Thanks to the goodexperience car buyers have had and the ability of Asian manufacturers togradually adapt their vehicle offerings to American tastes, they have sincebeen able to boost their North American market share to over 30 per cent.

Asian OEMs no longer depend on price for their business success. Pricewas their main selling point up until the early 1990s, when their ‘cheap’cars taught the ‘big three’ the meaning of fear. The Asians successivelytook advantage of the flexibility afforded by the quality image they hadcreated, which is extremely important in North America, and increasedtheir prices. Toyota and their Asian counterparts can now afford to keepout of the crippling price wars, and still succeed in gaining market share.

Emulating the successful strategy of the Japanese OEMs, Koreanbrands managed to get a foot in the door and quickly expand their positionin the US market. With more than 30 per cent and 10 per cent compound


1964 2004

Export DemandProductionExport DemandProductionProduction

North America Western Europe

Other regions Japan

8,37 7,28

0.9

0.6

0.6

7.288.37

0.63

0.14

North America Western Europe

Other regions Japan

6,62 14.71

11,99 8.48

6.620.25

1.11

0.25

1.11

0.24 1.131.79

1.76

0.04

1.4

1.79

1.76

0.04

1.4

1.31

0.0511.99

0.190.98

Figure 3.2 Regional distribution of car production and demandworldwide 1964–2004 (million vehicles)Sources: R L Polk Marketing Systems, Global Insight, VDA, Roland Berger StrategyConsultants

annual growth rate (CAGR) respectively in the period from 1994 to 2004,Kia and Hyundai were the fastest-growing car brands in the United States.Similar to Toyota, the Koreans are also upgrading their brand perceptionon the back of quality, which consequently enables them to raise theirprices. Kia and Hyundai have already progressed to the lower midsectionof the market in terms of price. The entry-level market segments they have‘freed up’ extend an open invitation to the burgeoning Chinese automakers, which will soon begin to follow these proven patterns to developa presence in the American market. Besides the growing market opportu-nities created by the upward price movement of the established Asianmanufacturers, the development is accelerated by the current excesscapacities of 2.5 to 3 million vehicles in China (with a rising tendency), aswell as the growth of the market in China itself, which is lagging behindexpectations. Initial announcements of companies’ intentions to importhundreds of thousands of vehicles into the United States to sell locallyhave set things in motion.

Increased pressure on the European fortressesJapanese and Korean brands have also launched a broad frontal attack onEuropean markets. No segment is being spared. Even in the premiumcategory – traditionally a segment dominated by European OEMs – Lexus is

50 Major challenges

Note: The ‘big three’ are GM, Ford and Chrysler. Asian = Japan + other Asian OEMs

ROW

Asian

‘Big 3’ 74% 73% 71% 70% 68% 65% 62% 61% 59% 58% 57%

23% 23% 24% 25% 26% 28% 30% 31% 33% 34% 34%

3% 3% 4% 5% 6% 7% 7% 8% 8% 8% 9%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Figure 3.3 Market share by brand in North America 1995–2005Sources: JD Power, Roland Berger Strategy Consultants

in the process of completely repositioning itself, defining a new brand corewith hybrid engine technology. According to the press releases, Nissan’spremium brand Infinity is about to be introduced in Europe. In the mediumterm, Nissan is planning to exceed Lexus’s present market share. Thuscompetition is set to intensify, even in the premium segment. Yet ‘escapingupmarket’ into ever more complex technology does not seem to do the trickthese days given the recent experience of Mercedes-Benz and others.

As a result, Asian auto makers have established themselves aspermanent players in the European market as well. There are, however,some significant differences between Europe and the United States, whichhave so far restricted their success in the world’s second largest economiczone. These are:

� Europe has a strong local car-making industry with traditionally highbrand and customer loyalty.

� Europe is the home base of the biggest premium OEMs.� European volume manufacturers maintain a stronghold in the entry-

level segments and defend their market positions with product blitzesand, in some cases, very successful cost-cutting programmes.

� Innovation and brand perception still play a significant role in people’spurchase decisions.

However, since Europe’s economy has become stuck in a rut and the bignations have begun reforming their social security systems, theconsumption climate and customer priorities have shifted in favour oflower-priced offerings. Asian OEMs are also reaping the benefits of failedstrategies implemented by some European OEMs, such as Volkswagen,which wanted to sell ever more technology at ever higher prices. In someinstances, such strategies have resulted in a dilemma. Although customersdemand cost-intensive features (for example airbags), they are not verykeen to pay a premium for them.

Moreover, Asian companies have cleverly adjusted their designs to suitEuropean tastes – frequently with the assistance of Italian automotivebody engineers such as Pininfarina, which have greatly influenced auto-motive design trends for many years. Simultaneously, Asian auto makersare getting an additional boost from their superior quality positioning,which often drives critical purchase impulses in the embattled volumesegment. As a result of these factors and developments, Asian OEMs, aftersuffering a setback in 2001, have been able to expand their Europeanmarket share to 19 per cent as of 2005.

Just like in the United States, there is a certain time lag between KoreanOEMs and their Japanese competitors in terms of market launch.


Recently, however, they have displayed dynamism. In Europe as well asthe United States, Kia and Hyundai are now the fastest-growing brands.Nonetheless Toyota, globally considered the toughest competitor forEuropean and American OEMs, will continue to produce unfetteredgrowth rates of around 8 per cent in Europe over the next few years.

In a stagnating market, this obviously means that some players will beforced out. Consequently, four Asian auto makers now rank among theworld’s top 10. In 2006, Toyota will very likely overtake GM as theworld’s biggest OEM. With total market capitalization of €150 billion, itexceeds the combined value of GM, Ford and DaimlerChrysler. Otherleading Asian manufacturers have pulled into the fast lane as well. Selling2.5 million vehicles (an increase of 11 per cent year on year), Hyundai, forexample, generated after-tax profits of €1.9 billion (up 7 per cent) in 2005– another record-breaking result. And the company is budgeting for evenmore growth – at least another 10 per cent in 2006.

Is this a case of déjà vu with new OEMs from China, Indiaand Eastern Europe?The rapid growth of the automotive markets in China and India goes handin hand with the emergence of new car makers that are also receivingsupport through government policies. What opportunities do thesenewcomers have in competing with the big automotive conglomerates

52 Major challenges

ROW

Asian

German

French

Note: Cars only

28% 29% 29% 28% 28% 32% 33% 33% 32% 34% 34% 33% 35%

26% 24%20% 20% 23%

22% 23% 22% 21%23% 25% 25% 23%

8% 8%11% 11%

11%13% 13% 13% 14%

15% 14% 16% 19%

38% 39% 41% 41% 37% 33% 31% 32% 33%28% 28% 25% 23%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

«

Figure 3.4 Market share based on OEM origin, EuropeSources: VDA, JD Power, Roland Berger Strategy Consultants

globally? Will the meteoric rise of the Japanese and Koreans now befollowed by the decade of the Chinese and Indians?

There are certain arguments to support this assumption. Asian manufac-turers have used the growing acceptance of Japanese and Korean brandsin North America and Europe to adjust their prices upwards. In recentyears, this has created a gap in the price spectrum, which now opens thedoor for Chinese, Indian and Central and Eastern European OEMs. Initialindications that they will fill the gap are emerging.

China’s largest auto maker, SAIC, has secured key technology andbrand rights from Rover. Nanjing Automobile bought the Rover plant,complete with its English workforce with their automotive industry expe-rience. Brilliance, BMW’s joint-venture partner, will offer its flag ship‘ZhongHua’ car, with its C and D class ambitions, for the incredibly lowprice of €19,000 on the German market. The Dacia Logan, built inRomania, exceeded Renault’s first year sales forecasts by far, sellingalmost 13,000 vehicles. Theoretically at least, Chinese and Indian manu-facturers benefit from very low-cost production factors, especiallypersonnel costs but in other cost areas too, given that statutory regulationsconcerning the equipment and safety of workstations, for example, areminimal. Indian car makers Tata and Maruti are also preparing to enter theEuropean market.

Another catalyst that will aid the rapid rise of Chinese and Indian manu-facturers is their easy access to know-how. Thanks partly to mandatorygovernment requirements (such as licence regulations) and supported bythe outstanding growth opportunities in emerging markets with noexisting brand loyalties, new car makers from the emerging markets arefinding partners at minimal cost who will help and guide them in the low-cost production of good cars that are also suitable for selling in establishedmarkets. The current stagnation of the triad markets further aids thisdevelopment, given that the growing demand in China and India makes itpossible to continue to employ highly competent workers in the short termat reasonable cost.

At first glance, very little seems to contradict the fast emergence of theChinese, Indian and Central European newcomers, especially in view ofthe enormous progress made in recent years coupled with the will thatthese countries have to propel themselves into a better future. On theother hand, many ambitious companies’ expansion strategies have failedin the past. With the exception of Hyundai, no newcomer has made it intothe premier league in the past 20 years. The list of those that failed tomake the grade is long: Proton from Malaysia, Avtovaz/Lada fromRussia, Kia and Daewoo from Korea and Mahindra from India. Manyothers have been taken over or play only a regional role.


What special challenges do newcomers have to overcome to be able toplay a critical role in the global race for success? How can establishedmanufacturers take advantage of the opportunities in the emergingmarkets without fostering unwanted competition? What options doEuropean and US manufacturers have to defend their home markets andmarket share against increased attack from Asian manufacturers? Canestablished manufacturers utilize new markets to improve their cost baseand thus their competitive positioning on a global level?

SURVIVING BY SUCCEEDING IN THE NEWEMERGING MARKETS

In a liberalized world without major restrictions to trade, the future ofOEMs and automotive suppliers will be decided in the newly devel-oping markets of Asia and Eastern Europe. These are the only placeswhere demand will grow in terms of absolute volumes and sales; theyare the only places where auto makers will find the low-wage workersthey need to remain globally cost-effective and competitive in theirtraditional triad home markets in the era of hybrid costing. Those whomiss the opportunities in these booming markets will be left with verylittle room to manoeuvre in the continued consolidation of the auto-motive industry.

Growing demand is restricted to emerging markets

While the demand for vehicles continues to stagnate on a high level inNorth America, Western Europe and Japan, demand will increasesignificantly over the next few years in emerging markets, especially inChina and India, but also in Brazil and Russia. The key drivers of thisdevelopment are rising household incomes among the population, thestabilization of basic economic indicators, and the continuousexpansion of (highway) infrastructures, as in India. Moreover, citizensof these countries have a strong desire not only to meet their individualmobility needs by purchasing a vehicle, but also to express theirgrowing prosperity. The sum total of these factors translates intoaverage growth rates of more than 7 per cent until 2015 in theseemerging markets.

54 Major challenges

Sustained cost advantages in emerging markets

In addition to the development of local sales potential, labour cost savingsof a factor of 10 to 20 are the primary drivers behind companies offshoringthe manufacturing part of the value chain to emerging markets or estab-lishing production sites there. Differences in the education levels of theavailable staff, infrastructure deficits (such as unreliable power supply),added logistical costs and measures to protect the firm’s legal position(such as intellectual property rights) wipe out a substantial part of theimpact that labour cost savings have on production costs. Nonetheless,even considering these factors and risks, clients’ projects still yieldsavings potential of 15 to 20 per cent over the total cost of production anddevelopment at sites in established markets. From a Western European orNorth American perspective, complete offshoring to China or India isunavoidable or expedient in very few cases only. It frequently makes themost business sense to develop sites in Central and Eastern Europe orCentral and South America. For instance, absolute savings at a productionsite in Central China compared with one in Eastern Romania total just 50cents per hour. In other words, the labour cost savings would be offset bythe higher logistical costs.

Experts project that the difference in hourly wages will hardly change inthe medium term, even if wage rises continue at their present rate. This isbecause of the higher starting level in industrialized nations, which means


Basic economic indicators

GNP[USD bn]

2000 2005

Exports[USD bn] 10.6% CAGR

Inflation[%]

42.3

83.2

India's highway infrastructure project

1995 2005

723

355

6.5% CAGR

1995 2005

4.3%

10.2%

Figure 3.5 Development of basic indicators and highway infrastructurein IndiaSources: Economist Intelligence Unit, Investment Brief (Indian Embassy)

that the absolute rate of wage increases is already higher here than inemerging markets. According to an EIU scenario (see Figure 3.6), theabsolute difference between hourly wages will actually grow in thecoming years. Moreover, the anticipated productivity increase inemerging markets will be significantly higher than in the triad markets. Asa result, product cost advantages will shift even further in favour of theemerging markets.

Challenges for established OEMs and newcomers

It is not easy to keep exploiting the comparative growth and cost advan-tages of emerging markets sustainably. Established OEMs and newcomersalike will have to address a wide range of challenges. These are:

� a large number of first-time buyers and minimal brand loyalty;� high levels of price sensitivity and diversity in regional markets;� high fixed costs and operations that lack critical size;� demand volatility, exchange rate fluctuations and trade barriers.

56 Major challenges

0.6 0.7 0.8 0.9 1.0 1.1 1.4 1.8 2.1 2.4

22.4

25.2 25.8 26.5

29.1 29.2 29.0 29.6

22.7 22.524.3

30.0

32.9 33.2 34.0

37.3 37.0 36.6 37.1

22.0 22.8 23.5 24.3 25.0 25.9 26.727.6

18.416.917.0

19.5 20.3 21.1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average wage costs [b/hour]

EU-15

Germany

USA

RussiaChinaIndia

X 28

X 11

Figure 3.6 Comparison of wage cost development in industrializednations and emerging marketsSources: Economist Intelligence Unit (EIU), Roland Berger Strategy Consultants

High number of first time buyers and minimal brand loyaltyThe vast majority of customers in emerging markets are first-time buyers,and many of them have no experience with cars. The only exceptions arefirst-time buyers making the transition from two-wheelers to cars. Theydo, however, represent a relatively large segment of the market. In India,for example, more than 5 million two-wheelers are sold each year. About25 per cent of these customers plan to buy a car in the next few years,which translates into a total market volume of more than 1 million cars. InIndia, a total of 80 million people will have the financial wherewithal topurchase an automobile in 2007.

Similar to East German car buyers after German reunification, first-timebuyers in emerging markets are indeed brand oriented, but not as brandfixated as customers in established markets. Although disposable incomeshave increased, they are still limited, so people opt for the car that deliversthe best combination of low upkeep costs and modern design and featuresfor a price that falls under their personal limit. The car’s resale value playsonly a minor role in purchasing decisions at this time.

These buying patterns create equal selling opportunities even for brandsthat do not play a leading role in the big automotive markets of today.Buick’s success in China is a good example. This brand does not generatemuch market share for GM in the United States but in China, where it has


Very rich > 20,0001)

1996 2007

1.2

32.5

54

44

33

Consumer class ~ 4,500

Emerging ~ 2,300

Aspirant ~ 980

Poor ~ 440

5.2

75.5

87.7

20.2

16.5

1) Based on purchasing power parity, this is the equivalent of US$100,000 per household

Annual household income [USD]

Million households Million households

• In 2007, more than 80 million households will have adequate disposable income to afford a car

• The impact of increasing disposable income is evident in consumer goods markets

Figure 3.7 Demographic structure and disposable incomes in IndiaSources: Economist Corporate Network, Roland Berger Strategy Consultants

been given a fresh, modern positioning and offers solid product/performance ratios, it is a yardstick for the midsize-premium segment.

High levels of price sensitivity and diversity in regionalmarketsEven though Mercedes-Benz, BMW and Audi are establishing assemblyand production sites in emerging markets, the majority of cars sold intoemerging markets go for less than €8,000. In India, for example, such carsmake up more than 60 per cent of the total market. Obviously, theperformance and features of these vehicles are not identical with those ofmore expensive models that are also sold in the triad markets.Nonetheless, the level of the established competitors has to be reached – atleast visually – especially in terms of design and comfort.

In the wake of a growing model portfolio and rising local productioncapacities, price pressure has entered the Chinese market. Even in themid-range and higher price segments, the past 12 months have seen listprices and transaction prices fall by more than 20 per cent in some cases.

The specific vehicle properties that drive customers’ decisions to buy acar not only depend on individual buyer segments, they also vary consid-erably between regional sales markets. In keeping with the old adage‘China is more than China’, customers in the north-east place more

58 Major challenges

1) Rediff.com survey, 2004; 8841 responses from 25 Indian cities

• The total lifecycle costs of the vehicle are critical criteria in the decision-making process.

• A typical Indian buyer expects European quality at Asian prices.

• Resale value plays a very minor role given that cars remain with the first owner for a long time. Nonetheless, the used car market is beginning to grow.

• Driving comfort is a must, given that long traffic delays are common and the infrastructure is still inadequate.

• Only car makers with a strong presence in the country emphasize vehicle maintenance and after-sales service.

Feature Ranking1)

Driving comfort 1

Maintenance 2

After-sales service 3

Fuel consumption 4

Price 5

Equipment 6

Appearance 7

Other 8

Resale value 9

Total lifecycle cost

Figure 3.8 Factors influencing purchase decisions in the midsizesegment in IndiaSources: Rediff, Roland Berger Strategy Consultants

emphasis on vehicles and brands that are especially known for durabilityand reliability, whereas people in the south and south-east tend to go forinternational brands.

High fixed costs and operations that lack critical massResearch and development, production, sale and service in the automotivebusiness remain capital-intensive activities. Even if production changesover from fully automated assembly lines to more manual processes toexploit the labour cost advantages of the emerging markets, hundreds ofmillions of euros worth of investment will still have to be pumped in toensure that production remains competitive on cost and quality. To justifysuch investments, annual production volumes of at least 100,000 orideally 200,000 vehicles per model or model family have to be churnedout. Given that not even China – the largest of the emerging markets withabout 4 million vehicles sold in 2005 and very strong competition – is ableto absorb such volumes, plants in emerging markets can be competitiveonly if export strategies for these vehicles targeting neighbouring andtriad markets are developed simultaneously.

Substantial investments are also required in sales and service to ensurevehicles are presented and maintained in a way compatible with the brand.Even though such investments are usually not made by auto makers but byindependent car dealerships, they too require certain minimum volumes tojustify their investments. One of the biggest financial and operational


Size of circle = global sales 2005Note: prices in brackets indicate range

Overview prices of selected A segment models

Price [EUR]

Eastern Europe

CitroënC1

Peugeot 107

10,000

2,500

5,000

7,500

China India Brazil South Korea

Toyota Aygo

Fiat Panda

Dacia Logan Fiat Palio(6,000-7,000)

Geely HQXiali (3,500-6,000)Chery QQ

Hyundai Atos(8,600-10,400)

Maruti Zen (7,200-7,400)

Tata Indica(5,600-6,200)

Maruti 800

VW Fox (5,500-10,500)

Kia Picanto(8,700-10,800)

Daewoo Matiz(8,000-10,300)

Production country

Figure 3.9 Volume car prices in key emerging marketsSources: JD Power, Roland Berger Strategy Consultants

challenges in this context is ensuring the availability of service centresand spare parts supplies across the huge geographical expanses of coun-tries such as China and India.

While economic minimum volumes are fairly irrelevant in protectedmarkets given that prices and margins are well above global market levels,the kinds of volume that need to be sold increase dramatically when suchmarkets are liberalized. This is currently very well demonstrated in China,

60 Major challenges

North-west –underdeveloped region

• Traditional values, price sensitive, fuel consumption and maintenance costs very important

• Established brands with high levels of trust in terms of reliability and durability preferred (eg VWSantana or Jetta)

South-west –mountain region

• Traditional values, albeit easy adaptation to new technologies and car models due to government development policies

• Price sensitive, high emphasis on fuel efficiency and maintenance costs

• ChanganGroup, ChanganSUZUKI JV, ChanganFord JVmanufacture in Chonqqing

Central China

• Home of DongfengAuto and PSAand Nissan joint ventures

North-east –old industrial region

• Traditional values, price sensitive• FAW production site, incl. FAW-

VW JV and FAW Mazda,6 plants

• Prefer established brands with a good reputation for reliability and durability (eg Audi A6)

East

• Open to Western cultures and new technologies

• SAIC joint ventures with VW and GM in Shanghai

South

• Traditionally large percentage of imported cars

• Open to foreign influences and cultures

• Honda, Nissan, Toyota joint ventures concentrated in Guangzhou

• Prefer Japanese cars over American and European cars (very strong aftersales market forJapanese cars)

North –Beijing and vicinity

• Diversified values, emphasis on fuel consumption and maintenance costs

• Prefer German brands over US brands

Figure 3.10 Regional customer preferences in ChinaSource: Roland Berger Strategy Consultants

123

-17 -2

20

198

65 3 165

Compo-nents

Ener-gy

Directwages

R&D Over-heads

Sales Depre-ciation

TaxesOEM JV Chinese model

Cost advantagesof Chinese OEMs

Cost disadvantagesof Chinese OEMs

-17 -2

20

198

65 3

Compo-nents

Ener-gy

Directwages

R&D Over-heads

Sales Depre-ciation

Taxes

Figure 3.11 Cost disadvantages in China as against the globalbenchmark (in CNY 000)Sources: Expert interviews, Roland Berger Strategy Consultants

where prices are falling significantly while vehicle sales and service stan-dards are rising to allow companies to differentiate themselves from thecompetition.

Demand volatility, exchange rate fluctuations and trade barriers

Young, dynamic economies are always subject to special risks resultingfrom virtually unforeseeable shifts in their financial system and politicalsituation. Drastic drops in demand as well as substantial changes incurrency exchange rates and government trade restrictions (import duties,local content provisions) may follow such seismic shifts. They have agrave impact on the profitability of investment decisions. In an increas-ingly networked and globalized world, the domino effect cannot be ruledout. The Asian crisis of 1998 and the subsequent devaluation of multiplecurrencies, for example, resulted in as much as a 40 per cent drop indemand in Brazil at the end of the 1990s.

Success strategies for established auto makers

To successfully develop the potential of emerging markets, establishedOEMs will have to master a whole series of specific challenges. The firstof these is to gain a thorough understanding of local market conditions andcustomer requirements. The second is to develop specific low-costcompetencies. Then they will need to integrate emerging market activitiesinto the operations of a global R&D, production and sourcing system.Most importantly, they must safeguard intellectual property rights. All ofthese aspects and more also need to be embedded in management struc-tures and personnel development systems that have been modernized witha view to the special challenges of globalization.

Understanding and meeting local market requirementsUp until a few years ago it was sufficient, and indeed very lucrative, to gointo emerging markets such as Brazil, China or South Africa and sellvehicle models that were no longer competitive in the embattled triadmarkets on the grounds of outdated design and technical features.Volkswagen did this with great success for years with the Beetle in Braziland Mexico, and continues to do so today, for example with its City Golf,a derivative of the Golf I, made and sold in South Africa. From a mere cost


and liquidity angle, this strategy sometimes makes economic sense giventhat the production costs of older models are significantly lower becausethe products are less complex, and they allow manufacturers to attainmarket-specific objectives more easily. Naturally such strategies are alsoless capital-intensive, because they use machines and tools that havealready been amortized.

In an era of liberalized markets, this type of approach increasinglyappears to be doomed to failure. In the premium segment, the trend wasevident even before this. Mercedes-Benz’s attempt in the mid-1990s tocontinue production – in India – of the E Class type W124, manufacturedin core markets from 1985 through 1994 but no longer built in Europe,failed miserably. After all, customers who were able to afford the highprice tag for this E Class wanted to drive around not in a discontinuedmodel, but in the very same one they had seen on their trips to Europe.

Overall, established car makers, particularly those in the volumesegment, are facing the challenge of having to technically ‘slim down’products featuring complex engineering for emerging markets in order toalign their costs with local spending abilities. On the other hand, theirdesign and features must be such that local customers do not feel they aredriving an outdated model. In this context, adaptations to local customerpreferences are absolutely crucial. Part of the reason that Volkswagen lostmarket share in China was because it simply ignored the preferences of itsChinese customers. Appropriate strategies for this booming market wouldhave been to offer the Jetta instead of the Golf and the Fox instead of thePolo.

Developing low-cost competenciesVolume segment manufacturers must develop specific low-cost compe-tencies if they want to take a leading role in emerging markets in themedium term. Those who do not have a competitive entry-level model inthe €5,000 to 8,000 price range will lose many first-time buyers to otherbrands/OEMs. Moreover, this approach also means forsaking volume,sales and margin potential to finance the necessary denser sales andservice networks. And those first-time buyers who can later afford to buyin higher price segments will either upgrade within the same brand orswitch to premium brands.

But how does a company create such a low-cost/low-price entry-levelmodel if the mere manufacturing costs of common entry-level models(excluding selling costs/overheads) in triad markets exceed €7,000 andare often far higher than that? Cosmetic ‘de-contenting’, such as leavingout airbags, xenon lamps or catalytic converters, is certainly not the

62 Major challenges

answer. Our experience shows that established auto makers can deliversuch vehicles only if they take a radical approach:

� forgoing redundant corporate structures and processes that drive costs;� focusing on the technically feasible aspects that customers are willing

to pay for;� taking consistent advantage of cost benefits resulting from modular-

ization as well as developing, sourcing and manufacturing at low-cost sites;

� assigning dedicated multifunctional teams that work largely independ-ently of group structures;

� ensuring targeted integration of suppliers that also meet the fourrequirements stipulated above.

With its Dacia Logan, Renault provides a perfect example of the practicalimplementation of this approach. Although built on the same platform asthe Renault 19, the remainder of the vehicle was newly developed with astrict focus on cost optimization. Some components from current seriesmodels were used. Others were based on completely new approaches toensure all requirements were met. This stringent ‘design-to-cost’approach resulted in a much higher percentage of manual labour beingused in production than is the norm in modern car plants. As a conse-quence, chassis structures became less complex and had higher toler-ances. Given that this was not at odds with customer requirements in thismarket segment, the approach yielded substantial savings.

Global R&D, production and sourcing systemServing emerging markets locally from pure CKD assembly plants isfrequently the first step to more intensive market penetration. As tradebarriers decline (through World Trade Organization (WTO) membership,for instance) and demand volumes rise, the profitability of doing more ofthe value creation in emerging markets increases accordingly. Yet given theenormous capital intensity of certain value creation activities, such aspressing and painting equipment, the approach of developing market aftermarket separately is still relatively uneconomical in many cases. To ensurethat such equipment is used to its full capacity, there are already many auto-motive plants in Brazil, China, India and South Africa exporting virtuallycomplete vehicles or expensive aggregates, such as engines, transmissionsor axles, within the scope of a worldwide production system.

At this time, Hyundai is probably the most aggressive auto maker whenit comes to establishing production sites in emerging markets. The new


plants in China, Russia, India, the Czech Republic and Slovakia make asubstantial contribution to the growth of this automotive group. In Russia,Hyundai is one of the fastest-growing manufacturers; in India thecompany more than doubled its production volume from 2002 to 2004.One-third of the Indian output (about 75,000 cars) is now being exported,primarily to Africa, the United States and Latin America. Consequently,India is not merely a production site for local demand; it is also being usedas a hub for other markets.

Under the catchphrase ‘global sourcing’, a lot of effort in recent yearshas gone into taking advantage of supplier cost potential in emergingmarkets. Initially, the focus was mostly on subsidiaries of establishedsuppliers. As suppliers increasingly consolidated and the automotiveindustry grew in China and India, recent attempts have been directedtowards exploiting the cost savings potential of these new players in thevendor market. A few of them – Bharat Forge among them – have beenhighly successful in this.

As the number of available university graduates with a technical back-ground declines and cost pressure in research and development increases,emerging markets are beginning to play a more interesting role as loca-tions for global R&D networks. Brazil has already evolved into a keysupplier of R&D services, for instance within the Volkswagen Group;India is set to move centre stage for all established auto makers in theyears to come. The country will play an important role even for premiumOEMs such as DaimlerChrysler, which offshored their R&D activities toBangalore as early as 1997.

Safeguarding know-howThe more intrinsic networks with local R&D and production partners are,the higher the risk of valuable know-how that has been developed overmany years being disclosed to third parties. Considering that many of thenew markets are engaged in a very long-term process of playing catch-upand are very diverse, intensive knowledge transfer is often required todevelop production and development resources and new suppliers. Onthe one hand, this transfer must be both planned and accepted to preventsometimes insurmountable hurdles from being erected in day-to-daybusiness operations. On the other hand, it has to be absolutely clearwhenever such transfers are made that there is a risk of critical know-howbeing communicated to partners who still have to learn how to handleand protect other people’s intellectual property. The lack of legal safe-guards, and perhaps even the existence of protectionism, can sometimesresult in confidentiality and non-disclosure agreements becoming

64 Major challenges

virtually worthless. The aim must be to find the right level of know-howtransfer to develop the business without weakening the company’s ownknowledge base.

‘Globalizing’ management structures and personneldevelopmentManagement structures and personnel development systems will alsohave to reflect the importance and challenges of successfully devel-oping opportunities in emerging markets. Given the liberalization ofemerging markets, it is completely inadequate to approach these coun-tries with a ‘second-rate’ team. Moreover, executives should not beencouraged to rotate to new positions too quickly. Especially in Asiancultures, long-term relationships are key to successfully negotiatingcontracts with business partners and are even more important in imple-menting them properly. Recruiting, personnel planning and personneldevelopment teams should increasingly integrate staff and executivesfrom the emerging markets. The value of emerging markets must bereflected in corporate hierarchies by allocating management positionsaccordingly. Responsibility for the operational business in emergingmarkets such as China and India absolutely must be assigned at topmanagement level.

Success strategies for newcomers

Newcomers such as Chery, FAW, Geely, SAIC and Tata have taken upadvantageous positions in their respective home markets in recent years –through joint ventures and increasingly also through autonomous efforts.This development was and is being supported by local governments. Asmarkets continue to be liberalized, newcomers are, however, increasinglybeing subjected to the tough competition of the global market. To surviveas independent companies through the long-term consolidation of theautomotive industry, these newcomers will have to master a series ofspecific challenges. They will have to:

� develop independent brands;� develop products fit for the global market and autonomous technology

competencies;� implement export strategies.


Developing independent brandsOnly a few Asian OEMs have successfully built up the kind of brandawareness in Europe and North America that would allow customers todevelop emotional connections with them. Despite being active in Europefor many years, Asian car makers regularly rank near the bottom of the listwhen consumers are asked how much they like a certain brand. However,this fact did not negatively affect the Asians’ overall success, because theywere able to win over customers with rational arguments. Nowadays,Japanese OEMs and Hyundai stand for quality and good value for money.The new competitors will first have to work hard to build up this kind ofimage while simultaneously striving to create a differentiated brandperception. Being recognized as a car maker with ‘reasonable prices andOK quality’ is not enough on its own, not even in the emerging markets.How important a brand can be is evident in the sudden sales boost experi-enced by former Daewoo vehicles when they started being sold under theChevrolet brand. In any event, auto makers must understand that creatingtrue brand value is a process that can take years, even decades, in the auto-motive industry.

Developing products fit for the global market andautonomous technology competenciesThere is no doubt about it – Indian, Chinese and Russian car makers donot yet possess the technological competencies to allow them to competewith European or Asian OEMs. Highly public failures such as the crashtest of the Chinese Landwind SUV and the low sales figures of Tata inGreat Britain underscore this fact. To be able to keep up in the increas-ingly liberalized global competition as autonomous suppliers, thenewcomers will have to close these competency gaps. Buying up patentsand production facilities, as SAIC and Nanjing Motors did when theylegally acquired Rover’s competencies, is likely to remain the exceptionrather than the rule.

Probably the most attractive way of closing competency gaps, in ouropinion, is to intensively integrate and utilize R&D service providers suchas AVL, EDAG, Karmann, Magna-Steyr, Pininfarina and others. The mainfocus of the know-how transfer in these business transactions is on bodyand overall vehicle competencies. Moreover, strategic partnerships withlarge, technology-driven suppliers such as Bosch, Continental, Delphi orSiemensVDO will be helpful in addressing electrical and safety issues andin closing gaps in engine and chassis-related proficiency.

Comparing the breakneck speed with which the leading newcomers areevolving with the historical development of Japanese and Korean OEMs,

66 Major challenges

it is safe to assume that some of the new players will already have closedall of the key competency gaps within the next 10 years.

Implementing export strategiesTo be able to finance all of the investments necessary to develop vehiclesfit for the global markets and build competitive plants, newcomers fromthe emerging markets will also have to develop export markets.Obviously, they will not be able to export cars that are subject to legalrestrictions, such as licence manufacturing agreements. At this time, inde-pendent suppliers are shipping only to export markets where the statutoryand customer requirements are relatively low. The sales volumesgenerated in these markets will not suffice in the long term to escape theindustry’s consolidation pressure. The ambitious newcomers fromemerging markets will therefore be compelled to export to automotivecore markets as well.

Despite good long-term prospects for some of the newcomers, we shallnot see any momentous shifts in market share, given that the newcomerswill be confronted with much stricter safety, emissions and fuelconsumption standards and will first have to build up distribution andservice networks in these core markets.

A recent Roland Berger Strategy Consultants study reaffirms thisopinion. While more than 40 million people in the United States haveannual incomes of between US $15,000 and 50,000, which would makethem an ideal target group for cheap vehicles from China, cars in thiscategory have barely sold at all in recent years. Only Hyundai was able toexceed the 100,000 vehicles mark, which it did with two models in thesame year. Against the backdrop of rising fuel prices and the fact thatvehicle upkeep costs have become more important as a factor in people’spurchase decisions, our survey indicates that a new market for cheap carscosting less than US $10,000 will develop in the United States. ChineseOEMs such as Chery and Geely are well positioned to move into thissegment. However, they will have to sell their cars for at least US $7,500in order to rake back the cost of adapting them to US statutory require-ments and to cover additional distribution and marketing costs.

Given the lack of sales and service networks in the core automotivemarkets, we consider the hurdles still to be high, albeit not insur-mountable. Independent dealers and fast-fit chains are waiting for theirchance. Automotive News Europe ran the headline ‘Some German Opeldealers will sell Chinese cars’ on 5 August 2005. Allegedly there arealready plans to utilize the Opel distribution network, currently sufferingfrom excess capacities, to sell new brands.


CONCLUSION

The globalization challenge is, is the automotive industry raising thechampions of tomorrow? The points made in this article show that theanswer to this question is multifaceted. In any event, the leading OEMsand suppliers of today are indeed giving R&D assistance to new manufac-turers from emerging markets. Some of these new manufacturers willevolve into competitors to be reckoned with. On the supplier side, BharatForge is already fit to play in the premier league.

Many of the new suppliers will, however, fall prey to continuedindustry consolidation. Equally, OEMs from established core markets thatare currently considered leaders will become victims if they do not takethe necessary restructuring action in time, or if they fail to implement itconsistently enough. The current problems at Fiat, Ford and GM, as wellas at Delphi and other suppliers, underscore the dramatic negative conse-quences of holding on to old sinecures for far too long.

Ultimately, the progress of automotive globalization will make carsmore affordable and better for us – the customers and drivers.

68 Major challenges

4

The value chain challenge:networks, the strategy

for successMarcus Berret, Partner, Roland Berger Strategy Consultants

As a key sector of the global economy, the automotive industry is secondto none in driving the development of new product and process tech-nologies. Ever since car makers and component suppliers began to buildup huge surplus capacity worldwide, it has also been one of the mostcompetitive industries. As a result, pressure to cut costs and improveperformance in the automotive value chain has been growing constantlyin recent years.

Auto makers and their component suppliers thus found themselvesforced to reinvent their value chain processes at regular intervals.Attention initially focused on perfecting the art of assembly lineproduction in the 1970s, followed by a focus on ‘lean’ development andproduction to improve efficiency in the 1980s. In the 1990s, value chainsbecame increasingly globalized as production plant and sourcing activ-ities spread to countries with low labour costs.

Now, in the first decade of the 21st century, the stakes have been raisedfurther still. To enable continued growth and catering to ever more varie-gated customer wishes, despite stagnating markets, manufacturers havesubstantially broadened the range of models they have on offer. Thenumber of models marketed by European manufacturers has indeed morethan doubled in the space of just 10 years (see Figure 4.1). During the sameperiod, lead development times have been slashed by between 10 and 20per cent – even as vehicles have become technologically more complex.

Cost pressure also increased as Asian vendors grew their market shareand made overcapacity – currently sufficient for around 20 million units –

69

worse still. One fruit of this development is the less than satisfactoryearnings situation at numerous car companies, including Ford, GeneralMotors (GM), Fiat and DaimlerChrysler, not to mention many of theircomponent suppliers.

In our view, OEMs, component suppliers and development andproduction service providers must therefore join forces to pull three keylevers that together can optimize the entire automotive value chain (seeFigure 4.2):

� Lever I: value chain breakdown (‘what?’). This lever optimizes thepart played by every link in the value chain (original equipment manu-facturers (OEMs), component suppliers, development serviceproviders and production service providers).

� Lever II: footprint (‘where?’). This lever optimizes the physical andgeographical development and production networks operated by allcompanies involved.

� Lever III: business model (‘how?’). This lever optimizes collaborationbetween each link in the value chain, for example in the form of jointventures or strategic partnerships.

70 Major challenges

Number of vehicle models marketed byEuropean manufacturers

Time from concept approval to roll-out(in months)

1998 2000 2002

Europe North America JapanStandard models Derivatives (eg soft-tops)

1998 2000 2002 2004 2006e 2008e

100

125

150163

213

238

50

50

75

50

75

75

88

75

138

75

162

76

2004 2006 2008

20

30

40

Figure 4.1 More model ranges but shorter development cyclesSource: Roland Berger Strategy Consultants

LEVER I: VALUE CHAIN BREAKDOWN, ASTRONGER FOCUS ON CORE COMPETENCE

In recent years, vehicle manufacturers have consistently rolled back theirshare of the total value chain. Whereas 70 per cent of value was added in-house in the 1960s, this figure had dwindled to just 34 per cent or so by2004. These days, having external suppliers deliver completelypreassembled modules and systems straight to the OEMs’ assembly lines– and even having them fit these modules in the vehicle shell – hasbecome business as usual. While opening up considerably more businesspotential for component suppliers, this trend also imposes far greaterresponsibility on the same firms, demands greater skills and exposes themto higher risks.

Beyond parts production, recent years have also seen OEMs outsourcethe development and production of entire vehicles. Engineering serviceproviders such as EDAG and Pinifarina and production service providerssuch as Karmann and Magna Steyr have benefited from this practice,boosting their sales by nearly 15 per cent per year since the mid-1990s.

Notwithstanding these developments, the way roles have been split invalue chains to date is far from optimal. All too often, car makers areinconsistent in the way they relocate activities, and hence also in the way

The value chain challenge 71

Lever I:Value chain breakdown

• OEMs: Focus on develop-ment/production activitiesthat shape the brand

• Component suppliers:Positioning as integrators orcost-oriented componentvendors

• Development serviceproviders: Projectmanagement andstandardization services

• Production serviceprovider: Services to handlepeaks and help OEMs enternew markets

Lever III:Business model

• Productivity can be raisedsignificantly only byimproving collaborationbetween

– OEMs and OEMs

– OEMs and componentsuppliers

– Component suppliers andcomponent suppliers

• Challenges:

– Choosing a suitable formof collaboration

– Adjusting skill sets

– Choosing the rightpartners

– Sharing risks andopportunities fairly

• Ongoing relocation of valuelinks to countries with lowlabour costs

• Challenges

– Choosing products andservices that are suitablefor relocation

– Choosing the rightlocation

• Existing plant in countrieswith high labour costs cansurvive , eg by becomingmore flexible and reducingpersonnel expenses

Lever II:Physical service provision

Figure 4.2 Levers to make the value chain more efficientSource: Roland Berger Strategy Consultants

they scale back internal capacity. This leads to a situation where bothparties – the OEM and the component supplier – keep capacity available.Consequently, at the latest by the time when they have to decide who doeswhat, the manufacturers often still tend to opt for in-house production toavoid wasting internal capacity.

Conversely, OEMs have already transferred too much competence toexternal suppliers in some areas, electronics being a good example. Thismakes the former more heavily dependent on the latter than ever before,especially with regard to the quality of the components and modulessupplied.

One subject of heated debate in the past few months has been whyGerman cars have become less reliable. The numbers are sobering.According to a study by the ADAC (the German automobile association),251,000 vehicle breakdowns were recorded in Germany in 2004, against216,000 in 1999 (see Figure 4.3). Interestingly, the mileage clocked upremained more or less constant in this period.

The number of cases in which electronic problems are the cause of break-downs has risen from 50 to nearly 60 per cent. However, this is not onlybecause of the generally greater importance of electronics in all kinds ofvehicle function, as can be seen from a direct comparison betweenEuropean makers and their Asian rivals, whose figures look substantiallybetter. According to the KBA, Germany’s Federal Motor Vehicle Office,the number of recalls also more than quadrupled between 1994 and 2004.

72 Major challenges

No. of vehicle breakdowns in Germany (000) No. of recalls in Germany

Of which caused by electrical/electronic (E/E) components or systems

125 135 148

2000 2002 2004

231242

251

E/E share[%] 52 56 59

2000 2002 2004

94

127

144

Electronic con-tent as % of totalvehicle costs

21.5 21.8 22.0

Figure 4.3 Breakdown and recall statistics, 1994–2004Sources: ADAC, Roland Berger Strategy Consultants

Over the past few years, numerous vehicle makers have farmed out allaspects of the management of second- and third-tier suppliers to externalsystems integrators. Ironically, they are now starting to complain aboutlosing direct contact with smaller component suppliers, a fact that is inturn putting the brake on innovative dynamism.

It is therefore high time to address one crucial question. How will theroles played by all parties to the development and production of automo-biles evolve in future? A subset of this question is, what will happen to theskill sets needed by each player?

Car makers must therefore ask themselves which skills they need tokeep in-house to what depth, and to what extent they want to rely evenmore heavily on external partners in future. On the other side of theequation, component suppliers and development/production serviceproviders must gain a clearer understanding of what business opportu-nities the future holds, and what skill sets will be needed to exploit them.

Car makers: focused on core competences that shapethe brand

In the years ahead, car makers will be compelled to invest even more oftheir scarce financial resources in design, development and sales/marketing. They will also have to pump proportionally more money intonew growth markets, such as China, India, Russia and the Middle East.Consequently, fewer internal resources will remain available for capital-intensive production areas such as foundries and injection moulding plant.

In light of this situation, we expect car manufacturers’ in-house share ofthe value chain to drop further to around 20 to 25 per cent of total devel-opment and production costs by 2015.

Most OEMs today still take each make-or-buy decision in isolation.They often lack any clear idea of what the overall value chain ought tolook like in future. It is nevertheless vital for them to systematically combthrough every activity they perform in-house. They must then clearlydefine what they want to carry on doing internally in future and whatactivities they want to farm out in the medium to long term. In addition,this analysis must draw clear distinctions between different assemblies,systems/modules and even individual components. It may even benecessary to draw distinctions on the basis of regional markets.

We would therefore recommend breaking the analysis down intothree steps:


� Step 1: Define the ‘candidate’ blocks to be investigated. These blockscan be combinations of systems, modules or components, or they canbe individual process steps (coachwork pressing, final assembly of thedashboard, and so on).

� Step 2: Determine what influence each candidate block has on themanufacturer’s brand promise (such as the joy of driving at BMW orsafety at Mercedes-Benz), and gauge the extent to which potentialexternal providers for each block are in fact available on the market(see Figure 4.4).

� Step 3: For any block that is not of core significance to the brand, thelast step is to calculate in detail whether outsourcing would yield costbenefits. At this stage, it is critical to consider the following items:higher transportation and handling charges; the external suppliers’anticipated profit margin; and, in particular, an estimate of thoseoverhead costs that will remain in-house in spite of outsourcing. Inpractice, these are precisely the areas in which mistakes are oftenmade. One common error is to assume that overheads will be elimi-nated entirely if activities are outsourced. This generally causes theactual financial benefits of outsourcing to fall short of defined targets.Another mistake is to assume that overhead costs will remain static

74 Major challenges

Influence onbrand imageYes

No

High Low

Drive shaftsand axles

Lighting system

Braking system

Chassis/drive electronics

Hood/tailgate

Gearbox

Back end

Occupant safetyCommunication/entertainment

Fenders

Steering

Engine

Enginemanagement

Wheel suspension

Wheels

Central locking system

Seats Suspensionand dampers

Doors

Front end

Windscreen wipers

Exhaustsystem

Cockpit

Figure 4.4 Example of how an OEM might define its core competenciesSource: Roland Berger Strategy Consultants

despite outsourcing. This view is equally unrealistic and often causesfirms to keep activities in-house after all (see Figure 4.5).

As well as comparing running costs, it is naturally also important totake account of the one-off charges associated with outsourcing (suchas transferring machines, drawing up a social plan to accompany theheadcount reduction, and writing off plant that becomes surplus torequirements).

Once future core competencies have been defined, the company mustthen go on to identify the skill sets it will need and take steps to close anyexisting gaps.

Component suppliers: focused on components orintegration

In recent years, the automotive component supply market has grownconsistently at around 3 to 4 per cent per year. Better still, this growth hasbeen profitable. The world’s 500 largest publicly traded componentsuppliers have thus seen their return on capital employed (ROCE)rebound sharply since 2002, following the slump that lasted from 1997through 2001 (see Figure 4.7).


Payroll

2.5

0.9

1.5

0.5

0.5

0.3

0.9

13.3

8.89.2

1.50.2

Supplier's margin

Remaining overhead inthe event of outsourcing

‘Buy’ costs‘Make’ costs Supplier'sprice

Materials

Factoryoverheads

SG&A

Logistics13.9

11.8

-4%

0.4

Figure 4.5 Sample cost comparison calculation for make-or-buydecisions (in euros)Source: Roland Berger Strategy Consultants

76 Major challenges

Coachwork

Windows

Doors, tailgate

Actual Target

‘Black box’outsourcing

In-houseproject

Cockpit• Dashboard

• Air-conditioning• ...

Seats

Door upholstery

...

Suspension

Steering

Brakes

Cylinder heads

Air/fuelintakeRadiator

On-board electronics

Infotainment

Systems integration

Eng

ine

Cha

ssis

Co

achw

ork

Ele

ctro

nics

• Inventory all resources/skillsavailable worldwide

• Boost resources by outsourcingnon-core activities

• Identify HR/resourcerequirements

• Identify existing gaps

Inte

rio

r

Figure 4.6 Example of how an OEM might define its future skill setsSource: Roland Berger Engineering Study

11.111.7

9.5

11.9

13.4

11.9

7.36.6 6.4

5.86.3

7.1 7.16.7 6.8

8.2

5.6

5.3

1999 2000 2001 2002 2003 2004

ROCE

EBIT

ROA

Figure 4.7 Profitability of the world’s 500 largest publicly tradedautomotive component suppliersSources: Bloomberg, Roland Berger Strategy Consultants

As OEMs continue to farm out activities and areas of competence toexternal suppliers, the market for automotive components will continue topresent attractive growth opportunities in the years ahead. The question is,what strategies will enable individual component suppliers to exploit thislucrative potential to the full?

To answer this question, Roland Berger Strategy Consultants havecombed the global component supply industry in search of particularlysuccessful and less successful companies. We then compared thestrategies they have pursued over the past five years. Our investigationfound that successful suppliers behaved differently from their lesssuccessful competitors in five key business dimensions. These dimen-sions are company size, product portfolio, customer portfolio, R&Dspending and the degree of vertical integration.

Statistical evidence confirms a clear link between company size andearnings power, for example – although the correlation is by no meansdirectly proportional, as business used to believe back in the days whenbig was always beautiful. In fact, our analysis shows that, alongside theheavyweights, small component suppliers too tend to be markedly moreprofitable than their medium-sized rivals.

There are several reasons for this. Many small component suppliersservice highly profitable niche markets, for example, and are wellprotected by the patent rights they own. Moreover, owing to their relativelysmall sales revenue, these companies have not generally been targets foracquisition by their customers. Many of the mid-sized companies weexamined are currently evolving from family-owned and/or family-runbusinesses to large corporations. In this transitional phase, they often lack


Successful suppliers Less successful suppliers

11 Company size

44 R&D spending

55 Vertical integration

22 Product portfolio

33 Customer portfolio

Sales< EUR 0.4 billion

Sales ofEUR 0.4 – 4 billion

Sales> EUR 4 billion

Low(<2% of sales)

Average(2–4% of sales)

High(>4% of sales)

Low Average High

Focused Diversified

Focused Diversified

Figure 4.8 Patterns of success in the automotive component supplyindustrySource: Roland Berger Strategy Consultants

the necessary structures and management resources, or they are simplytrying to service too many product groups at once.

A clear relationship can likewise be identified between profitability andthe focus of a company’s product or customer portfolio. Top performersgenerate 86 per cent of sales with their one largest product group and 58per cent of sales with their three largest customers, for instance. Supplierswhose performance is substandard tend to have a much more diffuseproduct and customer portfolio.

It will doubtless come as no surprise to discover that the top-performingcomponent suppliers are also those that invest above-average sums inresearch and development. The same companies also outstrip the lowperformers in terms of their degree of vertical integration. Apparently,numerous campaigns to shrink the value chain have not (yet) positivelyimpacted the annual financial statements.

Many of the more successful small and mid-sized component suppliershave a strong focus on gaining a perfect mastery of individual compo-nents. The more these companies grow, however, the more important itbecomes for them to acquire the skills needed to integrate individual sub-modules or components into complete systems or finished modules. Onlythen can they meet OEMs’ demand for external partners that possess end-to-end value chain competence (in design, simulation, production,assembly, and in test bed, off-road and on-road testing) as well as compre-hensive process management, subcontractor management and logisticsskills.

One copybook example of a company that has systematically acquiredthese integration skills is Brose Fahrzeugteile GmbH & Co. KG, head-

78 Major challenges

Average ROCE,1997–2003

Business clusters, by sales (US$ m)

9.410.0

7.8 7.1 7.36.4

4.8

7.26.6

8.8

0 50 100 250 500 1,000 4,000 10,0007,000750- - - - - - - - - -

Figure 4.9 Correlation between profitability and company sizeSource: Roland Berger Strategy Consultants

quartered in Coburg, Germany. Since its inception in 1919, Brose hassystematically and ambitiously transformed itself from a componentmanufacturer into an integrator of modules and systems (see Figure 4.10).

Back in 1928, Brose made the first manual window lifters ever. Electriclifters came in 1963, followed by electronically controlled devices in1986. A year later, the first door module, consisting of a window lifter,window pane, window guide and impact protection unit, was fitted in anAudi 80 Coupé. Since then, things have moved fast. Today, a Brose doormodule is made up of a wide range of add-on components, such asspeakers, locking systems, sealing elements and control elements for thewing mirrors. To complement its window lifter and door module business,the company gradually also moved into seat adjustment and lockingsystems. The reward for this relentless and systematic accumulation ofcompetencies has been impressive indeed: Brose has averaged 13 per centannual growth for the past 50 years, expanding faster and moresustainably than virtually any other automotive component supplier.

One key success factor at Brose has been a style of managementfocused rigorously on the long term. Others have been optimal interplaybetween mechanical, electrical and electronic components, an ability torespond swiftly to changing market conditions and customer require-ments, and a healthy mix of technology and cost leadership.


Degree ofintegration

1986

Electronicwindow lifters

1987

Door modules

2002

Integrateddoor modules

Door systemswith frames

1928

Manual windowlifters

Figure 4.10 Brose Fahrzeugteile – how a component manufacturerbecame a module supplierSource: Brose Fahrzeugteile GmbH & Co KG

Engineering service providers: beginning to find their focus

Engineering service providers are a very disparate group (see Figure4.11). Over the past decade, this corner of the supply network has enjoyedabove-average growth rates, expanding on average at around 15 per centper annum since 1996.

Dark clouds have however been looming on the horizon, at the latest sincethe start of 2004. Demand for external engineering services has shifted intoreverse, for a number of reasons. One is that a number of OEM engineeringdepartments have moved over to a strict insourcing policy in order toabsorb excess in-house capacity. Demand is also being hit by car makers’redoubled attempts to keep competence that is critical to their brands in-house. Furthermore, one of the principal drivers of the outsourcing trend –sharp growth in the variety of vehicle models – is likely to peak in the nextyear or two. At the same time, OEMs are now making first-tier suppliersresponsible for entire systems and modules, in the hope that they will alsohandle and finance the necessary engineering work.

Despite all these negative effects, the market for engineering services isstill likely to present lucrative business opportunities in the medium to longterm. This market segment will receive positive stimulus from the fact thatin-vehicle technology – especially in the field of electronics – is contin-

80 Major challenges

Completevehicle

ModulesCompo-nentproduc-tion

BertrandtEDAGIVM MSX International

EDAGRicardo

Chassis AVL List MSX Rücker IVM Ricardo

MSXRicardo

Engine AVL ListRicardo

Ricardo

Drive train AVL List RückerRicardo

AVL List RicardoIVM Rücker

Plantconstruc-tion

Produc-tionplanning

Inte-gration/projectmgmt.

TestingModelling/ proto-typing

Simu-lation/compu-tation

Com-ponentdesign

Con-ceptualphase

Design/styling

Research/predevelop-ment

Development process

Coachwork

Interior BertrandtEDAGIVMMSXRücker

EDAG

ElectronicsAVL List EDAG ETAS RückerBertrandt ESG Ricardo

BertrandtEDAG

BertrandtRicardo EDAG

EDAG

AVL ListETASESGRicardo

Figure 4.11 Activities covered by engineering service providersSource: Roland Berger Strategy Consultants

ually becoming more complex. Auto makers’ cost-conscious efforts tostandardize or at least harmonize, certain technologies (such as softwareengineering), modules and components across different vendors willlikewise fuel further demand for these services. This is precisely wheretremendous opportunities lie in store for engineering service providers.

The providers concerned will nevertheless only be able to tap thispotential if they carve out a keener profile for themselves. Back in theheady years of rampant growth, many such firms tried to cover everyconceivable service, from predevelopment to plant construction – and thatin every single product group. This inevitably left them with a decidedlyfuzzy market position, preventing many of their business areas fromachieving critical mass. The pivotal challenge will therefore be to definefocal areas of future activity, and to bring both qualitative and quantitativeresource allocation into line with this new orientation. Our experienceindicates that many development service providers could raise their effi-ciency by double-digit percentages if they were to optimize their capacitymanagement in particular. A further challenge in the years ahead will be toadjust their network of locations in line with customer expectations.Above all, this will involve building and ramping up capacity in low-labour-cost regions such as China and India.

Full-service providers and dedicated production serviceproviders: services to unplug bottlenecks and catalyzeentry to new markets

A series of full-service providers for auto makers have emerged in therecent past. Today, the likes of Karmann and Magna Steyr can not onlydevelop entire vehicles and get them production-ready: they also have thecapabilities to volume-produce vehicles, which they do with the BMWX3, the Mercedes CLK and the Jeep Grand Cherokee. Alongside theseflexible market players, dedicated production service providers such asValmet (for the Porsche Boxster) have gained a foothold on the market.

For car companies, drawing on the services of such firms makeseminent sense. Capacity bottlenecks can be unplugged. Small-series andniche models can be rolled out efficiently at highly flexible plant, despitelow unit volumes. By no means least, the car makers themselves have totie up far less capital for development and production.

In this segment too, however, a few boom years have now given way to amore sober mood. Large numbers of new niche models, such as VW’s soft-top and the latest 6 Series BMW, have been or are still being manufactured


in-house. New plants are springing up in the world’s growth markets, eventhough existing capacity in the triad markets is not being rolled back.Current global overcapacity – enough for some 20 million vehicle units – isthus likely to remain acute until beyond 2010. Added to this is the fact thatOEMs themselves have in the meantime set up more flexible productionplants of their own. One direct consequence is that production serviceproviders saw an average of two to three percentage points shaved off theirprofits between 2001 and 2003.

Here again, however, production service providers can continue tooperate in attractive areas in future. One opportunity is to assist OEMs asthey seek to penetrate new growth markets such as China, Russia, Indiaand Iran. The idea of having service providers that absorb peaks rightacross the brand spectrum is also proving to be a viable option. In thisarea, production service providers must nevertheless make theirproduction processes and plants more flexible than they are at present.

Section summary: attractive growth opportunities formodule and system suppliers – major challenges aheadof engineering and production service providers

In future, OEMs will concentrate even more heavily on areas of compe-tence that are critical to their brand image. Many component suppliers can

82 Major challenges

Bertone

PininfarinaSantana

Valmet

Karmann

Karmann Magna Steyr

BertoneKarmannPininfarinaSantana

BertoneHeuliezKarmann PininfarinaMagna Steyr SantanaValmet

BertoneKarmannMagna SteyrPininfarinaSantanaValmet

Karmann BertoneHeuliezKarmannMagna St.PininfarinaSantanaValmet

HeuliezKarmannMagna St.Pininfarina

BertoneKarmannMagna St.PininfarinaSantanaValmet

Volumeproductionplant

Produc-tionengineering

Projectmanage-ment

Totalvehicleintegration

Compo-nentdevelop-ment

Totalvehicletesting

Produc-tionplanning

Volumemodelassembly

Styling/design

Heuliez

Figure 4.12 Overview of production service providersSource: Roland Berger Strategy Consultants

therefore look forward to sustained and very attractive growth, especiallyin the areas of drive and chassis products. All in all, we believe thatcomponent suppliers will increase their share of the total value chain fromaround 64 per cent today to about 73 per cent in 2015 (see Figure 4.13).

The outlook is less rosy for development and production serviceproviders, however. Most of the areas in which they operate are closer toOEMs’ own core competencies than is the case for the componentsuppliers. Accordingly, these service providers will be hit harder by theauto makers’ bias toward insourcing.

LEVER II: FOOTPRINT, GROWING PRESSUREON EXISTING LOCATIONS

The second lever to improve efficiency in the value chain is the opti-mization of physical footprint. The central question here is, where canwhat products and services be provided most efficiently?

In recent years, capital spending in the automotive industry has headedeast to the new growth regions of Asia and Eastern Europe at an aston-ishing pace. Manufacturers of the calibre of Hyundai, Kia, PSA and VWare currently erecting new assembly plants worth over €4 billion in


OEMs

Component suppliers

2004 2010 2015

1670 bn1750 bn

1849 bn

428

228

518

216

632

201

7788

88

Engineering service providersProduction service providers

CAGR

+1%+1%

+4%

Share of totalvalue chain[%]

11

73

25 -1%

Figure 4.13 Breakdown of the value chain in the global automotiveindustrySource: Roland Berger Strategy Consultants

Eastern Europe alone. The established triad markets are being left behind(see Figure 4.14).

Although production jobs are the primary target, the writing is alreadyon the wall for development activities as well. Here too, new jobs willbe created only in Eastern Europe (+2,000), China (+4,500) and Indiaand the Pacific region (+4,000) in the next 10 years (see Figure 4.15).In the coming years, car manufacturers will offshore the work of wholedevelopment teams to countries with low labour costs. China is veryclearly the OEMs’ favourite destination, followed by Eastern Europeand India. Simulation, machine tool construction, modelling and docu-mentation are among the activities that will feel the impact mostkeenly.

The same trend can be observed among automotive componentsuppliers and engineering service providers. Not a week goes by without acompany announcing its intention to invest in Eastern Europe whileslashing capacity in Western Europe. Italy, the UK and Spain are leadingthe way in axing local production capacity, whereas factories in Franceand Germany are usually retained but downsized.

84 Major challenges

1) Announcements made in 2003-2005 for the years 2004-2008

Others

14,950

BMWPSA

DC

Ford

GMGM

1,800

GM

1,290Ford

DC

Ford

VWHyundai

KIAPSA

Others2,430

Others1,180

DC Ford

850VW VW600 600

DC3,030

Toyota

4,480

China Korea BrazilSlovakia USA Belgium Poland PortugalMexicoCanada

Hyundai

GM

VW

Figure 4.14 Capital spending announced by OEMs, by country (in € million)Sources: JD Power, Roland Berger Strategy Consultants, OEMs’ press releases

Establishing low-labour-cost locations – a matter ofsurvival

The widespread belief that the benefits afforded by Eastern Europe andother locations with low labour costs will be eroded by substantial annualwage increases over the next 5 to 10 years is wrong. True, annual wagerises of as much as 10 or 15 per cent are no rare occurrence in manyEastern European countries. Given the low level from which they arestarting out, however, substantial discrepancies will remain in absoluteterms (see Figure 4.16).

In spite of lower productivity in locations with low labour costs,companies can thus still save up to 75 per cent of their personnel expensesfor a long time to come. And personnel expenses account for 25 to 30 percent of total production costs on average. It follows that, even allowing forhigher logistical and complexity costs and lower productivity, componentsuppliers can still expect to reduce total costs by 10 to 15 per cent bytransferring production to Eastern Europe. In the hard-fought componentsupply business, that can make the difference between staying alive andgoing under (see Figure 4.17).

The trend towards building up capacity in countries with low labourcosts will thus continue in the years ahead. Indeed it will accelerate, as a2004 study by Roland Berger Strategy Consultants discovered. Of therespondent mid-sized industrial companies, 90 per cent said they plannedto transfer further links in their value chain abroad in the next five years.


Trend in full-time equivalents, 2002–15

-500 Western Europe93,500

Japan43,600

North America32,200

India and theAsia/Pacific

region10,500

China4,800

EasternEurope1,900

Central andSouth America

3,200-500 +4,000

+/-0

+2,000

+4,500

+/-0

Figure 4.15 OEMs’existing and planned development resources (in full-time equivalents)Sources: Roland Berger Strategy Consultants, interviews with auto makers, companyinformation

To put that figure in context, only 69 per cent of these have relocatedvalue chain links to low-labour-cost countries in the past. Increasingly,even highly complex technological components are being caught up inthis wave.

Often enough, component suppliers have no other choice. When one oftheir OEM customers asks them to supply components direct to a low-cost

86 Major challenges

2004 2009

25 .3

5 .0

4 .2

4 .1

2 .9

2 .4

1 .8

1 .8

0 .8

25 .9

6 .7

5 .7

5 .2

3 .9

3 .2

2 .6

2 .5

1 .3

+ 0.5

+ 0.6

Germany

Czech Rep.

Hungary

Poland

Slovakia

Latvia

Turkey

Romania

Ukraine

Germany

Czech Rep.

Hungary

Poland

Slovakia

Latvia

Turkey

Romania

Ukraine

Figure 4.16 Labour costs (including non-wage labour costs) for anunskilled worker in Germany and Eastern Europe (€/hour)Sources: EIU, CE research, LLP, Roland Berger Strategy Consultants

54 54

23

35

38

1 3

5

2

3

Running costsat old location

(Germany)

114

Change inpersonnelexpenses

Change inlogisticscosts1)

Change inother

costs2)

Running costsat new location

(Romania)

100Other

Logistics

Personnel

Materials

1) Including the cost of capital inventories 2) Coordination, tax writeoffs, more scrap, etc.

-12%

+9%

+4%

-79%

±0%

-18

Figure 4.17 Comparative view: average costs for a component supplyfactory with annual sales of around €170 million (in € m)Source: Roland Berger Strategy Consultants

plant, the only question is, do the volumes and prices justify investing onthe ground in China or Russia?

On the other hand, a lot more preparation and careful consideration isneeded when deciding to set up a site from which countries with highlabour costs can import parts manufactured at low cost. Three key issuesmust be covered when preparing and planning to relocate production tocountries with low labour costs:

� Suitable products must be chosen.� A suitable production location must be chosen.� A detailed relocation plan must be drawn up.

Choosing suitable productsThe issue of exactly what activities are to be relocated is the mostimportant question of all. A five-step approach to answering this questionhas proven its value in the past (see Figure 4.18).

The first step involves drawing up a clear, understandable hierarchy of theentire product portfolio. A scoring model then enables products whosetechnology is too complex to be eliminated, as they are not suitable forrelocation. The third step is to examine the number of variants of each ofthe remaining products. Depending on the relative maturity of the short-listed low-labour-cost locations, the results of this examination may vary.


Point ofdeparture

‘Technologicalcomplexity’filter

‘Number ofvariants’ filter

Products

Definitionof relocationscenarios

Implementation risk

No. of variants

Product hierarchy

Technologies

Products rejected:• Product 1• Product 2• Etc.

Products rejected:• Product 3• Product 4• Etc.

Definition of product/technologies thatwould be suitable forrelocation

Payback period

Scenario 1

Scenario 2Scenario 3

1 2 3 4 Definition ofsuitablecandidates

5

+-

Volume '09

-

+

Technologicalcomplexity

Scenario 3

Scenario 2

Scenario 1

Figure 4.18 Determining the scope of production to be relocatedSource: Roland Berger Strategy Consultants

Products manufactured in a wide range of variants (that is, relativelylabour-intensive products) might be ideal for one candidate location butnot at all suited to another.

Products that make it to step four are divided up into individual processsteps. The various combinations of products and production stages arethen analysed to determine both the financial impact of and the risks asso-ciated with relocation. A series of plausible scenarios are then evaluated toarrive at a final decision. When analysing the financial impact, it isimportant to make sure that all relevant cost items are factored in,including the cost of training new people on site, higher logistical costs,the cost of producing new samples for OEMs, and the implicit cost of anydiscounts granted to the auto makers.

Choosing a suitable production locationA whole raft of criteria must be considered when looking for a suitablelow-labour-cost location. Practical experience has nevertheless shownthat a small number of criteria carry the most weight (see Figure 4.19).

Current personnel expenses at the target location, and above all antici-pated wage increases in the years ahead, are naturally two of the mostsignificant factors. Generally speaking, reliable information can only be

88 Major challenges

325

45

4

5

2

35

3.8

325

45

4

5

3

45

3.9

112

45

5

5

4

25

3.5

435

45

4

5

3

35

4.1

432

34

4

5

3

45

3.6

442

24

4

5

3

45

3.6

432

24

4

5

4

15

3.4

553

22

3

3

3

44

3.2

544

41)

3

3

3

31)

44

3.5

225

55

4

5

3

25

3.9

322

44

3

3

2

33

2.9

Criteria

New EU member countriesCan-didates

OthersNon-EU countries

1Very disadvantageous

LT LV ESTPL SKCZ H SLO TRRO UA RUSBG HR BIHMKSM

541

32

1

1

1

53

2.4

441

22

1

1

1

53

2.2

541

32

1

1

2

13

2.3

552

21

2

1

1

23

2.3

543

11

2

1

2

13

2.2

554

11

3

1

1

23

2.4

• Personnel– Current wage costs– Long-term wage trend– Availability

• Logistics– Distance– Reliability

• Economic andfinancial stability

• Political and legalstability

• Transparency

• Corp. income taxes• Customs tariffs

5 Very advantageous

Weight-ing[%]

30205030304060

7.5

10

12.5

55

100Weighted score

Ranking 2 7 1 165 5 9 10 7 11 12 16 14 14 124 2

Dut

ies/

taxe

sS

tab

ility

Co

sts

Figure 4.19 Simplified scoring model for choosing a location (example,Eastern Europe)Source: Roland Berger Strategy Consultants

gleaned through in-depth talks with industrial companies, job placementand investment agencies, and/or public bodies in the countries concerned.Component suppliers in particular should think about the kind ofemployees they will need very early on, and then conduct research todetermine whether the regions they have in mind actually have a largeenough pool of labour with appropriate skills.

Logistical costs are the second core issue. It is vital to ensure that trans-portation channels can be relied on absolutely, even in adverse weatherconditions. Otherwise, the buffers that have to be factored in would tie upcapital and quickly negate any savings made on labour costs, for example.It is also important to make sure that the target location is easily accessibleto visitors (customers, suppliers and the company’s own management).Proximity to a decent-sized airport is always expedient, for example. If areasonable solution is not found here, huge problems can occur duringstart-up in particular if it is not possible to respond swiftly.

The selected country must also enjoy long-term economic, financial,political and legal stability. Taxes and customs tariffs too should never beleft out of the equation. Depending on the product programme and thevalue chain model, it may further be necessary to critically assess theavailability of suitably qualified upstream suppliers.

Once priorities have been set concerning the preferred target countries,these countries must then be divided up and analysed on the basis of indi-vidual economic regions (see Figure 4.20). A final location decisionshould not be taken until the investigation has drilled down to a region ofno more than 200 or 300 square kilometres.


Economic regions in Romania

Industrialsystems

Injectionmoulding

Platingprocesses

Metal-working

Assembly ofwhite goods

Corridor IVPrague (CZ)Budapest (H)

Corridor IXKiev (UA)Moscow (RUS)

Corridor IVSofia (BG)

IVIV

IXIVIX

IV

Bucharest

Transportation corridors in Romania

50 100km

0

Arad

Oradea

Satu Mare

Cluj

Bistrita

Sibiu

BrasovPitesti

Craiova

Tg. Mures

PloiestiGaesti

Iasi

Galati

Bucharest

Timisoara

Figure 4.20 Definition of local regions and transportation corridors(example: Romania)Source: Roland Berger Strategy Consultants

Detailed relocation planOnce the scope of activities to be transferred has been defined and a targetlocation selected, it is time to map out a detailed relocation plan. This planwill feature a number of aspects:

� layout planning for the new plant (or extension);� punctual orders for the necessary production equipment;� punctual recruiting/appointment of the first level of management (in

particular the plant and HR managers);� punctual build-up of inventories to ensure that shipment can continue

even during relocation;� commencement of talks with the customer to prepare for initial

samples;� preparation of communication with employees and suppliers;� adjustment of overhead structures at the ‘home’ plant.

Section summary: solutions for locations in countrieswith high labour costs

With few exceptions, growth in the next few years will take place in coun-tries that have low labour costs. The cost benefits involved are quitesimply far too compelling. The situation is different, however, if acompany wants to transfer production lines from an existing high-wageplant to a low-wage plant but has no other business to take up the slack atthe original site. In such cases, social plans and sundry costs associatedwith plant closure can impose a crushing financial burden. It is notunusual for these expenses to add up to three or four times the projectedannual savings. Experience shows that, when the cost of capital is factoredin, this can extend the payback period to around four to six years.

This is precisely where factories in countries with high labour costsmust seize their opportunity. Personnel expenses at home can be reducedby as much as 15 per cent by lowering payroll costs, adding greater flexi-bility, raising the working week from 35 to 38, 40 or 42 hours withoutincreasing wage costs, docking overtime rates and/or cancelling vacationallowances and Christmas bonuses, for example. Since such moves addjust one or two years to the payback period, relocation then scarcelymakes economic sense. Numerous leading West European componentsuppliers have already opted to go this way in recent months and years(see Figure 4.21).

90 Major challenges

LEVER III: BUSINESS MODEL, MORE EXTENSIVENETWORKING WITHIN THE AUTOMOTIVE

VALUE CHAIN

The third lever to optimize the automotive value chain is improved collab-oration between everyone involved.

Much work remains to be done in this area. Business relationshipsbetween OEMs and their component suppliers, for instance, have deterio-rated alarmingly in recent years (see Figure 4.22). Many suppliers todaycomplain of an unparalleled decline in the way they are treated. To takejust one example, retroactive demands for one-off payments for ordersthat have already been completed land ever more frequently on the desksof component suppliers. Anyone who refuses to ‘pay to play’ can wavegoodbye to follow-up orders. Since only profitable component supplierscan continue to deliver required innovations and uphold the necessaryquality in the long run, this trend cannot be sustained for long.

The potential derived from optimizing the breakdown of the value chain(lever I) and optimizing physical service provision (lever II) can only beexploited to the full if all parties represented in the value work together(lever III). The forms which such collaboration takes must experienceradical change (see Figure 4.23).


Bosch

BroseContinental

Continental Teves

Delphi

EDAG

Edscha

FAG Kugelfischer

INALeoni

Schuler

Siemens VDO

Stuttgart, Sebnitz

All German plantsHanover-Stöcken

Gifhorn

Wuppertal

Fulda

Remscheid

Eltmann

LahrTwo GermanplantsAll Germanplants

Würzburg

Company Year Plants affected Employers' concessionsWages/welfare benefitsWorking week

Details of agreements/impact on employees

35 ’ 36-hour week

35 ’ 38-hour weekIncrease to a 40-hourweek35 ’ 40-hour week

40 ’ 44-hour weekfor white-collar empl.More flexibleworking hoursLonger workingweekMore flexibleovertime agreement35 ’ 40-hour week35 ’ 38-hour week

More flexibleworking hours

More flexibleworking hours

Welfare benefits and bonuseswaived

Under negotiation–

–

–

–

–

2% of welfare benefitswaived––

Agreed wage rise and bonusesfor 2005 waived; bonusagreements more variable forsubsequent yearsAgreed wage rises postponed;vacation allowance andChristmas bonus reduced

No lay-offs through 2007;plans for relocation to ChinaabandonedNot knownNot known

Headcount reduction limitedto 200–

Cap imposed on headcountreductionAvoidance ofrelocationNo lay-offs through 2006;home site saved––

–

Guarantees for 1,400 jobsthrough 2010

Figure 4.21 Factory-specific agreements that have reduced personnelexpenses (examples)Sources: Roland Berger Strategy Consultants, press releases

To simplify matters, distinctions can be drawn between six basic types ofcollaboration within the automotive value chain (see Figure 4.24). Thesection that follows outlines one successful example of each type andsummarizes the success factors for more intensive collaboration in the carindustry.

92 Major challenges

Base: Average of opinions on leading OEMs

DECREASE

3. Willingness to recompense cost savings

-4

4. Chances of earning an adequate ROI

-46

5. Willingness to shoulder development costs

-50

2. Quality demands +56

1. Price pressure +78

INCREASE

Criteria Change, 2004 versus 2002

Figure 4.22 Change in OEMs’purchasing behaviour from theperspective of their component suppliers (2004 versus 2002)Source: Supplier Business.com

TomorrowToday

1. Innovation • Networked solutions to problems• Incentives to innovate• Improvements across and between companies

• Solutions to problems mostly bilateral• No special incentives to innovate• Isolated, company-specific improvements

2. Leadershipand communi-cation

• Integrated value chain strategies/unified andcomplementary competencies

• Integrated processes• Intensive communication emphasizes trust• Full networking and integration of specialist

knowledge

• Company-specific value chain strategies• Focus on strong individual processes• Communication emphasizes commitment• Hierarchic collaboration

3. Access • Collaborative target agreement and escalationprocesses based on uniform standards

• Integrated corporate planning and control• Shared resources and capital spending• Close collaboration

• Local and/or company-specific standards• Independent corporate planning and control• Independent resources and capital spending• Loose collaboration

4. Risk • Profit and risk sharing• Contractual protection of intellectual property

• Short-term profit maximization• Simple contractual regulation of information

exchange

Figure 4.23 Paradigm shifts in forms of collaborationSource: Roland Berger Strategy Consultants

Joint ventures between component suppliers: theexample of HBPO (Hella Behr Plastic Omnium)

HBPO is an outstanding example of successful collaboration betweencomponent suppliers that involves cross-shareholdings. What is now theleading provider of front-end modules emerged in two steps between 1999and 2004, as parts of three component suppliers – Behr, Hella and PlasticOmnium Auto Exterior – came together. Today, these units stand togetheras a single, legally independent corporation with a total of eight sites inNorth America, Europe and Asia (see Figure 4.25).

In a very short time, HBPO became known throughout the industry as‘the module company’. It has cultivated a pronounced customer orien-tation and set itself the ambitious goal of becoming the clear global marketleader in front-end modules. By the end of 2004, HBPO had alreadycornered 23 per cent of the global market.

HBPO is unquestionably a success story. Four factors have been instru-mental in its astonishing rise:

� Attractive market segment: the market for front-end modules haswitnessed very positive development in recent years. Between nowand 2010, the global sales volume is expected to swell by as much as25 per cent per annum.


With cross-share-

holdings

Withoutcross-share-

holdings

Supplier/OEMSupplier/supplier

Partners involved

Typ

e o

f co

llab

ora

tio

n

Siemens VDO/Magneti Marelli

Toyota andits componentsuppliers

OEM/OEM

DaimlerChrysler,GM and BMW

Japanesekeiretsus

Toyota/PSA(TPCA)in Europe

Hella Behr PlasticOmnium(HBPO)

1.

2.

3.

4.

5.

6.

Figure 4.24 Types of collaboration in the automatic industrySource: Roland Berger Strategy Consultants

� Complementary capabilities: the joint venture constitutes the idealcombination of Hella’s lighting and electronics expertise with Behr’sknowledge of radiators and air-conditioning and Plastic Omnium AutoExterior’s mastery of coachwork parts, bumpers and crashmanagement. All three companies rank among the most innovativeplayers in their respective product segments. Better still, all three alsocontributed complementary customer portfolios to the joint venture.

� Flexibility: the new company is extremely flexible. It focuses rigor-ously on customers and their needs and wants. The recent inclusion ofPlastic Omnium in the organization is one fruit of this strict customerorientation.

� Cultural fit: the three joint venture partners all have comparablecorporate and management cultures. All three tend to focus corporatepolicy on the long term, for instance. As a general rule, this kind of softfactor is hugely important to the success of joint ventures.

Analysis of numerous other joint ventures confirms the validity of thesesuccess factors.

Strategic alliances between component suppliers: theexample of Siemens VDO and Magneti Marelli

The strategic alliance between Siemens VDO and Magneti Marelli iscompletely different from the example described above. In this case, two

94 Major challenges

1999 2000 2001 2002 2003 2004 2006e

Sales at HBPO (em) HBPO sites

≈70≈100

≈140≈180

≈210

352

≈700

Germany: Lippstadt and Meerane

Czech Republic: Mnichovo

Slovakia: Lozorno

Spain: Vitoria-Gasteiz

Korea: Jillyang, Seosan, Ulsan, Hwasung

Mexico: Puebla

USA: Troy/Detroit

CAGR +38%

Figure 4.25 HBPO at a glanceSource: HBPO company information

direct competitors decided at the end of 2004 to work together. This movecame about in response to Bosch’s dominance in diesel injection systems(see Figure 4.26).

The two partners have made it their goal to jointly develop a new gener-ation of diesel injection systems for smaller and mid-sized engines by2007. Although they are direct competitors, collaboration yields benefitsfor both companies:

� Complementary technologies: the new systems combine the magneticfuel injectors that Magneti Marelli developed with Fiat and fuelinjection technology from Siemens VDO. Magneti Marelli alone isdeveloping the electronic control unit.

� Protection of intellectual property: the relevant contracts put up veryhigh exit barriers for both parties. Effective protection is thus providedfor both parties’ intellectual property – usually the most critical issuein this type of collaboration.

One key challenge in collaboration between Siemens VDO and MagnetiMarelli is that the two companies’ customer portfolios overlap to someextent for the same product. Another issue is restricted access to theresources of the individual partners.


Shares of the global market for dieselinjection systems (2004)

MagnetiMarelli

Delphi

SiemensVDO

RobertBosch

24%

10%

64%

3%

Key data on the collaborative venture

• Announcement: October 2004

• Planned production startup: 2007

• Object:To jointly develop a new generation of dieselinjection systems for smaller and mid-sizedengines

• Aim:For both partner companies to sharplyincrease their market share

Figure 4.26 Aim of collaboration between Siemens VDO and MagnetiMarelliSource: Company information

Close collaboration involving cross-shareholdingsbetween OEMs and component suppliers: Japan’skeiretsus

With the exception of a few relationships that grew up due to uniquecorporate histories (such as those between Faurecia and PSA or MagnetiMarelli and Fiat), interlocking equity interests between OEMs andcomponent suppliers tend to be the exception on the European andAmerican markets. Not so in Japan, where closely interlocking interestsbetween auto makers and component suppliers – a construct known askeiretsu – have been a key aspect of the automotive value chain for manydecades. Toyota offers a fine example. Its extensive network involves cross-shareholdings and long-standing business relationships with and between822 individual component suppliers. The four most important of these areDenso, Aisin Seiki, Aisin AW und Toyota Industries (see Figure 4.27).

These companies often also get together to form joint ventures. Examplesinclude Advics (Sumitomo, Denso and Aisin Seiki), FTS (Toyoda Goseiand Horie Metal) and Favess (Koyo Seiko, Toyoda Machine Works undDenso). These companies are also helping Toyota build new plants –witness the assistance provided by Denso, Aisin Seiki and Aisan Industriesin relation to the new Toyota/PSA plant in the Czech city of Kolín.

96 Major challenges

Denso

Toyota Industries Aisin Seiki

Aisin AW

Toyota Motor

2.0%23.2%

22.2%0.7%29.5%5.4%

6.7%

2.0%

9.1%7.98% 0.1%

50.9%41.1%

Figure 4.27 Cross-shareholdings between Toyota and its four keycomponent suppliersSource: Supplierbusiness.com

Apart from interlocking capital structures, two other key factors shapethe keiretsus:

� Collaboration in a spirit of partnership: within a keiretsu, a culture oftrust and a willingness to learn from one another prevails. Toyota,Honda and Nissan, for example, all help their component suppliers tocontinually improve their performance by introducing and perfectingefficient production systems. Component suppliers that willinglyaccept such close collaboration generally have the assurance that theywill remain partners in the long term. The probability of follow-uporders is therefore at or around 100 per cent.

� Close coordination of planning: the companies in a keiretsu coordinatetheir planning very closely. This applies both to longer-term tech-nology and investment planning and to shorter-term changes involume planning.

In the past, the only drawback in this system was the absence, or at bestonly limited presence, of competition between the individual companies.Aware of this, the OEMs have in recent years taken great pains to reor-ganize traditional keiretsu structures (see Figure 4.28).


Up to 1985 Since 1995

CB

OEM A

Tier 1

Tier 2

Tier 3

Basicstructure

• A keiretsu pyramidstructure

Global M&As

Toyota Honda

Consoli-dation

Sepa-ration

NissanMazda MMC

• Consolidation among suppliers• Separation of suppliers at

Nissan, Mazda, MMC

Toyota

NissanMMC

Mazda

• Transition from a pyramid to anetwork structure

• Different strategies pursued bydifferent OEMs

Drivers • Growing market• Quality improvements

through collaboration inthe keiretsu

• Stagnating market• Fierce competition for market

share• Cost reductions due to open

sourcing

• Shorter technology cycles• Scarce R&D resources• Cash flow management

1985–1995

Processsatellites

Systemintegrators

Technologysatellites

Processsatellites

Figure 4.28 Changes in keiretsu structures and the drivers of thesechangesSource: Roland Berger Strategy Consultants

Close collaboration between OEMs and componentsuppliers without cross-shareholdings: the example ofToyota

During its process of internationalization in recent years, Toyota has gonea long way in opening up to non-Japanese component suppliers. In doingso, it has succeeded in carrying the trusting collaboration that charac-terizes the keiretsus over into its dealings with these new suppliers. Thisfact is reflected in surveys that describe the extent to which componentsuppliers are satisfied with OEMs: Toyota regularly comes top of theleague (see Figure 4.29).

Toyota expects a lot of its component suppliers. Its quality standardsare unrivalled anywhere in the automotive industry. On costs, too, it isno rare occurrence for Toyota’s buyers to inform their suppliers thatthis or that part will simply have to cost 30 per cent less in the nextproduct generation.

Unlike other car makers, however, Toyota is convinced that these objec-tives can only be realized through very close collaboration withcomponent suppliers. In other words, Toyota doesn’t just set goals: it alsohelps its component suppliers to meet them.

Four key tools enable all this to happen:

98 Major challenges

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

Toyota Renault-Nissan

BMW DCX VW GM PSA Ford

Cha

nge

sinc

e th

e la

st s

urve

y

Figure 4.29 Extent to which component suppliers are satisfied with theirOEM customers, 2004Sources: Supplierbusiness.com

� Mutual understanding: Toyota takes the trouble to try to understand itssuppliers’ business almost as well as they do themselves. An extensivecontrolling system also constantly monitors and analyses suppliers’performance.

� Intensive training: Toyota has set up a group called SPM (SupplierProduction Management) in its purchasing department. This groupproactively helps component suppliers to fine-tune their productionsystems (in a process known as kaizen).

� Permanent technical support: each component supplier has a fixed setof Toyota engineers who are permanently assigned to it. The goal is torectify problems before they even occur. Should problems arise never-theless – during a new product roll-out, for example – the support teamis beefed up immediately.

� Multilateral best practice sharing: Toyota organizes regular meetingsand conferences to promote the systematic sharing of best practicesbetween its component suppliers.

This kind of collaboration between the manufacturer and its componentsuppliers has been instrumental in Toyota’s emergence as one of the mostsuccessful car makers in the world.

Joint ventures between OEMs: the example of TPCA(Toyota Peugeot Citroën Automobile)

Now that the ‘merger mania’ between automotive companies hassubsided, collaboration that is focused on individual projects – perhapsengine construction or vehicle assembly – are coming back into vogue.One very topical and therefore very good example is PSA and Toyota’scollaboration on compact cars.

In 2002, Toyota and PSA decided to build a plant in Kolín, CzechRepublic, for the production of three models (the Peugeot 107, ToyotaAygo and Citroën C1) built on the same platform. The factory is scaled tocope with 300,000 units and went into production at the start of 2005.Three key factors have had a formative influence on this project:

� Homogeneous objectives between the partners: Toyota and PSA wantto use the Kolín site to make small, modern, high-quality vehiclesfeaturing attractive technology, and to sell those for low prices on theEuropean market.


� Role-splitting in line with core competencies: in deference to itsthorough knowledge of the European component supply market andits mature diesel technology, PSA is responsible for purchasing opera-tions and diesel engines. For its part, Toyota is contributing the ToyotaProduction System and is also in charge of gasoline engines.

� Clear and fair ground rules: each party has shouldered its share of thedevelopment costs. By contrast, the money invested in the plant willbe charged to the three brands according to manufactured units.

It remains to be seen what this joint venture delivers in the long term.Right now, however, expectations are very high indeed.

Collaboration between OEMs: the example ofDaimlerChrysler, GM and BMW

At the end of 2004, DaimlerChrysler and GM announced their intention topress ahead with joint development of a ‘two-mode’ hybrid engine. BMWjoined the alliance in September 2005. It remains to be seen whether thiscollaborative venture will be more successful than the Covisint electronicprocurement platform launched jointly by DaimlerChrysler, GM and Fordin 1999. Back then, the entire automotive industry had high hopes forCovisint. Owing to technical problems, management mistakes anddisunity among the participant car makers, the platform neverthelessfailed to deliver on its promise. In 2003, the founding companies retractedtheir interest in the venture.

In the case of collaboration on hybrid engines, however, the outlook isnot bad at all. The project already meets several of the key criteria forsuccessful cooperation:

� Pressure to act and a win–win situation: the three manufacturers shareone major problem. As hybrid technology gains an ever more securefoothold, they have fallen way behind their Japanese rivals, Toyotaand Honda. While vehicles such as the Toyota Prius advance fromsales record to sales record, GM, DaimlerChrysler and BMW do nothave a single engine that is ready for volume production. In an age ofspiralling fuel costs and ever stricter environmental legislation, that isa dangerous place to be in. This collaborative venture will reducedevelopment costs for each of the three partners. Far more important,however, is the time they expect to make up. DaimlerChrysler and GMplan to fit the new technology in vehicles such as the Chevrolet Tahoe,

100 Major challenges

the GMC Yukon and the Dodge Durango (on the North Americanmarket) as early as 2007.

� Clear role-splitting: all parties are contributing their current state-of-the-art research to the hybrid development project. The goal is themutual development of a modular total system. DaimlerChrysler willlead the development of rear-wheel-drive hybrid systems for saloons,while GM spearheads development for front-wheel-drive, four-wheel-drive and off-road vehicles. Each company is then independentlyresponsible for integrating the hybrid system in its own model range.

� Clear contractual agreements: the relevant contracts set forth clearrules governing the expertise contributed, such as Mercedes-Benz’sand Chrysler’s 10 years of experience, and the knowledge and proto-types contributed by GM.

Section summary: closer collaboration is needed

OEMs and component suppliers will be able to improve the efficiency ofthe automotive value chain only if they work a lot more closely together.Collaboration between component suppliers enables them to tap newproduct markets and regional markets. Improved cooperation betweenOEMs and component suppliers helps the latter to tailor their activitieseven more precisely to the needs of their customers. This in turn helpsthem prevent the build-up of idle capacity. On another plane, collabo-ration between OEMs reduces the investment risk faced by all partiesconcerned in a marketplace that is changing ever more rapidly.

Notwithstanding these successes, any number of less successfulexamples likewise testify to the validity of a number of generally appli-cable rules:

� Clear goals must be defined for collaborative projects.� The corporate cultures involved must be compatible.� Roles must be split unambiguously based on each party’s core

competencies.� Opportunities and risks must be shared fairly.� Rules governing the solution of conflicts must be spelt out clearly in

the contracts.

All these points require due attention when collaboration is still on thedrawing board, and they must be adequately reflected in the contracts thatare ultimately signed.


SUMMARY: ALL PARTIES INVOLVED IN THEAUTOMOTIVE VALUE CHAIN FACE THREE KEY

CHALLENGES

In an age of ever more intensive cost pressure and fiercer competition, carmakers and their component suppliers must strive for excellence morethan ever before. If they fail to do so, they will not live to tell the tale.

As they go forward toward this goal, the three levers we have describedin detail – the breakdown of the value chain, physical footprint and thebusiness model – will all play a crucial role. This assertion is borne out byour investigation of numerous successful and less successful companies inthe industry over the past few years.

Only those companies that define their core competencies in line withwhat the market demands and optimize the cost of their location networkswill survive. Ultimately, however, the master key that opens the door to asecure, lucrative future will be a commitment to closer, trusting,consciously designed collaboration.


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5

The technology challenge:progress or pitfall?

Silvio Schindler, Partner, Roland Berger Strategy Consultants

INTRODUCTION

Automotive companies in the established triad markets are confronted bya tricky market situation. Sales have been stagnating for years. Legalconditions and constraints have tightened, and customers are constantlybecoming both more demanding and more varied in their individual pref-erences. The industry has responded to this growing demand for diversityby creating a wide array of new models and vehicle segments. Theresulting information overkill – and the erosion of customer loyalty thatgoes with it – have made it all the more crucial for car makers to clearlydifferentiate themselves from their rivals, and to position their brandsastutely in respect of their targeted customer segments. While attractiveprices tend to be the main selling point for volume manufacturers, apitched battle for technology leadership and exclusive claims has brokenout among premium brands. In an attempt to differentiate themselvesagainst the competition, car makers have used advances in sophisticatedelectronics in particular to repeatedly roll back the limits of what is tech-nologically feasible. In consequence, high-tech content in premiumvehicles has experienced a quantum leap as manufacturers strive relent-lessly for unique selling propositions.

Numerous manufacturers have nevertheless discovered that stuffingvehicles full of technical innovations does not guarantee their marketsuccess. Wherever customers have been unable to intuitively perceive

the real value added by the new technology, or when it did not line upwith customers’ brand expectations, sales have consistently fallen shortof projections. Some manufacturers have also learnt the hard way thatcustomers will only accept mature technologies. If technological inno-vations are not really mature, they can do serious damage to a brand’simage.

Premium car makers thus find themselves faced with a dilemma. Onthe one hand, every new product launch compels them to come out withinnovative new technologies as evidence of their premium position,and to position their brand successfully and differentiate it from thecompetition. This situation is exacerbated by the fact that new tech-nologies nowadays spread ever faster – what ranks as ‘premium’ todaycan very quickly filter down to lower classes of cars and/or be adoptedby the competition. On the other hand, the need to master alternativecompeting technologies is driving costs and complexity to a level thatwill not be sustainable in the future.

To escape from the complexity and cost trap, car makers must restrictthemselves to key technologies. They must abandon the traditional‘technology creates demand’ approach that is obsessed with realizingwhatever is technically feasible. They must instead turn to a ‘tech-nology generates value’ approach that makes customers the focus of alltechnological development. Leading manufacturers have understoodthe opportunities that rigorous adherence to this approach affords interms of brand positioning, a keener brand profile and differentiationrelative to competitors. Successes and failures in applying this strategy– in some cases at one and the same company – nevertheless highlightthe very fine line that separates dream from disaster. The challenge is,therefore, to get customer orientation to permeate the entire organi-zation, systematically and completely. In the future, the key successfactor for premium auto makers will be what we call ‘customer-oriented technology management’.


THE STATUS QUO: TECHNOLOGYDEVELOPMENT WITHOUT CUSTOMER FOCUS

Technology development in transition

Competitive pressure sparks a blaze of innovationCar makers around the world are today facing a plethora of challenges thatvary considerably from region to region. In growth markets such as Asia,OEMs still have every reason to be upbeat about the promising salesoutlook. The most important thing here is to pick the right market strategy,choose the right local partner and build a commensurate sales network. Bycontrast, the established triad markets – the United States, Europe andJapan – present OEMs with far more daunting challenges. Conditions aredifficult, and markets have been stagnating for years. Legal constraintshave tightened up and customers are becoming ever more varied anddifferentiated in their individual preferences.

A macroeconomic trend toward individualism and individualization isindeed observable in society at large. This trend is sweeping all consumermarkets, triggering a veritable explosion of supply-side diversity. Seiko,for example, today has over 3,000 watches in its programme. Philipsmarkets more than 800 different televisions. The number of magazineson newsagents’ shelves has doubled in the past 10 years. And the averagesupermarket today stocks well over 20,000 products, as against 4,000 atthe end of the 1950s.

The automotive industry too has felt the impact of this trend. Carmakers have substantially broadened their model ranges to satisfycustomer requirements in ever more narrowly defined target segments,and to accommodate demand for more ‘individualized’ vehicles andvehicle concepts. The result has been a flood of new models and newvehicle segments. In the early 1980s, the vehicle segments were limited tosaloons, coupés, convertibles and estates. Today, customers also havevans, minivans, multi-purpose vehicles (MPVs), sports utility vehicles(SUVs) and a wide range of cross-over vehicles to choose from. And thetide shows no sign of ebbing. A parallel development is that vehicle life-cycles have shrunk by around three to four years over the past twodecades. Models used to feature in car manufacturers’ programmes for 9to 10 years on average. Now, new models are brought to market every sixyears.

The technology challenge 105

To make matters even more difficult for manufacturers, introducingnew model series nowadays inevitably involves upgrading the array offeatures fitted as standard. Customers in Europe quite simply expectsafety features such as airbags, ABS and ESP. Governments too areplacing ever more exacting demands on the ecological and safety aspectsof vehicles. In many cases, however, the extra cost of complying withstricter emissions regulations or fitting new safety systems cannot bepassed on to the customer. Customers expect – and get – ‘more car fortheir money’. Adjusted for inflation, a comparison of mid-range saloonssuch as the Mercedes C180 between 1993 and 2001 shows that list pricesfor standard models remained virtually static in this period, despite thefact that ever more add-on features (such as ABS, ESP, airbags and immo-bilizers) were fitted as standard (Figure 5.1).

Somehow, car makers must therefore find a solution to the followingconundrum: while volumes per model line are decreasing and prices arestagnating (at least for standard versions), they still have to satisfy greaterexpectations of more comfort, safety and ‘extras’.

Manufacturers vary the focus of their response to this dilemmadepending on how their brands are positioned on the market – that is,


19,53120,247 20,656

22,799

19,76318,78019,00218,921

18,151

1993 1995 1997 1999 2002

Adjusted for inflation Nominal price CAGR = compound annual growth rate

CAGR 2.6%

CAGR 1.0%

Figure 5.1 Price development of a standard Mercedes-Benz C class,nominal and adjusted for inflation (ex-works list price in euros,excluding value-added tax)Sources: DaimlerChrysler AG, Federal Statistical Office, Roland Berger StrategyConsultants

whether a brand belongs in the premium or the volume segment. Volumebrands whose primary differentiation criteria in the market are attractiveprices concentrate their efforts on cost efficiency and cost effectiveness.Economies of scale (especially in purchasing, development andproduction), operating efficiency and a global footprint are the key issuesfor these firms. At the other end of the scale, premium car makers areresponding to competitive pressures in a different way. In recent years,they have worked hard to position their brands precisely in specific targetcustomer segments, thereby carving out a keener brand profile. In an ageof information overkill, eroding customer loyalty and ever fiercer compe-tition, it is supremely important to distinguish a brand from its rivals bycreating an unmistakable genetic code. Brands are a source of orientationfor customers. They charge what is essentially a technical product – ameans of getting you from A to B – with emotion. But brands also givecustomers a chance to differentiate themselves from the competition, tocultivate a certain lifestyle and express a certain attitude or mindset.

Customers place their trust in brands whose brand characteristics andproducts best match their individual needs and wants. The basic rule isthis: the more sharply a brand profile is defined, the greater will be itsattraction and its ability to foster customer loyalty. In recent years,premium manufacturers have ignited a sparkling display of innovativetechnologies in an attempt to clearly delimit brand profiles and distinguishthemselves from their rivals. Technological progress – especially in thefield of electronics – has significantly improved the scope of high-techfunctions in premium vehicles. Competition between innovative tech-nologies has, however, also worsened the dilemma described above byonce again sharply driving up the complexity and cost of R&D activities,for example (Figure 5.2). To remain competitive in the future, manufac-turers are doing everything they can to wriggle out of this tight place. Thechallenge is to maintain the same level of customer loyalty and differenti-ation while reducing complexity and lowering costs. They will onlysucceed if they genuinely grasp what customers really want and need, andif they are able to focus their development activities accordingly.

Today’s innovation is tomorrow’s standardTechnical innovation was always the preserve of premium manufac-turers. It has traditionally been the lever that lifted them above theircompetitors. Thanks to a series of ground-breaking new developments,DaimlerChrysler in particular has earned a reputation as an innovationleader and thus justified its position as a premium manufacturer.Examples include monocoque body construction and passenger


protection systems in the 1960s, the introduction of ABS in the 1970s,the launch of airbags in the 1980s, and ESP in the 1990s. The period oftime for which a given technical innovation gives a car maker a uniqueselling proposition is diminishing constantly, however. It took the ABSsystem around 20 years to achieve 40 per cent market penetration.Today, it is fitted as standard in just about every vehicle sold inGermany. Compare this trajectory with ESP, which was deployed forthe first time in 1994 but took only 10 years to realize equivalentmarket penetration. This example illustrates how technological innova-tions that are initially designed for premium vehicles are filtering downever more quickly into the volume segments. Technologies thereforelose their differentiating characteristics ever faster. Premium brands areparticularly hard hit by this development, as it undermines their brandattraction and eats away at customer loyalty. Volume manufacturers donot face the same problem, because price is the issue on which theymainly seek to set themselves apart. They do indeed benefit from thespread of innovations since, subject to a certain time-lag, they realizenew technologies in high-volume production and achieve the corre-sponding scale effects. Ultimately, this advantage is also passed back topremium vehicles.


1993 2000 2001 2002 2003

• Model offensives

• Shorter lifecycles

• Greater use of new technologies

• Stricter legal requirements (emissionsnorms, safety regulations, consumptionregulations)

100%

246%CAGR 9.4%

Figure 5.2 Development of R&D costs per vehicle (adjusted forinflation) based on the example of a premium manufacturerSources: Roland Berger, DaimlerChrysler, Federal Statistics Office

The right mix of emotion and innovationTo avoid becoming expendable in this situation, premium car makersmust work hard to influence the way their brand is perceived. They mustoccupy a credible position and clearly demarcate themselves fromcompetitors. Also, their brand values must be coherent. If they want to beseen as innovation leaders, premium manufacturers have no choice but torepeatedly develop new technologies and get them to market as early aspossible – ahead of their rivals. Eager for fatter margins, almost every carmaker now wants to be regarded as a premium brand. Even manufacturerssuch as Subaru, until now far better known for being ‘rugged and robust’,are now claiming to be ‘premium’. It is not enough just to produce reliablecars with the odd high-tech component here and there, however. Since thestart of the 1990s, the leading European premium brands (Audi, BMW,Jaguar, Mercedes-Benz, Porsche, Saab and Volvo) have increased theirshare of new vehicle registrations from around 20 to around 30 per cent.Worldwide, German premium brands currently account for 40 per cent ofthe total premium market. In the luxury segment, this share leaps to aneyebrow-raising 80 per cent. So what is the secret of their success?

‘The key to success is to combine the right mix of emotion and substancewith consistent brand management,’ says Kay Segler, the man in charge ofthe Mini brand (source: Automobilwoche). He ought to know, given thatthe Mini ranks as a textbook example of successful brand positioning. Thepeople who revamped the Mini understood that Mini owners have a veryspecial relationship with their vehicles. This meant that developers had tokeep their hands off everything that was sacred to the original Mini design:go-cart-like handling, a central position squarely behind the steeringwheel, and minimal overlap beyond the car wheels. What Mini customersare less concerned about are the characteristics of the engine – in starkcontrast to BMW customers, for instance. The fact that BMW workedtogether with volume manufacturers such as Chrysler and PSA to build theMini engine thus in no way jeopardized the vehicle’s success. Above andbeyond the technical blueprint, BMW took great pains to design everythingelse in an authentic and brand-specific manner. From sales to service, frommarketing to communication, everything was specially tailored to meet theunique needs of Mini customers and carry the famous ‘Mini feeling’ safelyover into the new generation. Even internal staff and external consultantswere selected based on an assessment of whether they fitted in with thebrand motto: ‘Are you Mini?’

Another example of successful brand positioning – or an even greaterchallenge, a complete change of image – is the success story written byAudi. Over the past 25 years, Audi has managed to shake off the staid


image inherited from DKW, its predecessor brand, and establish itself asone of the leading premium manufacturers. When Audi introduced theQuattro, the company rigorously translated its classic advertising slogan‘Vorsprung durch Technik’ into a broad spectrum of innovations (such asthe Torsen differential gear) that all customers could experience for them-selves. The legendary Quattro S1 rally car set new standards in the worldof motor sports and towered over its rivals for a long time. What morevivid way to demonstrate the superior performance of this technical inno-vation in terms of driving dynamics and driving safety to customers! Atthe same time, this positioning injected the necessary dose of emotion.Ultimately, it was customers’ acceptance of the technological design thatmade the change of image a success. This feat was achieved by enablingcustomers to ‘feel the difference’ (that is, the generated value) in what, forthem, were two vital areas of technology: driving dynamics and safety.Crucially, the value that was generated aligned perfectly with the Audibrand’s catchphrase, and therefore helped distinguish it very clearly fromits competitors.

Technology development without customer focus

High tech that doesn’t generate value for customers isdoomed to failureNot all manufacturers’ attempts to position themselves have met with thesame success, however. Audi’s parent company, for example, is havingdifficulty establishing ‘VW’ as a premium brand. Although VW’s TouaregSUV has been a resounding success, its high-end flagship, the Phaeton, stilllacks momentum. When the Golf V hit the market, not even a fanfare oftechnological innovations was able to make up for the absence of a premiumbonus. Sales did not really shift into gear until prices were knocked downwhen the company gave away free air-conditioning systems.

The main reason for such sluggish acceleration was that customers didnot intuitively grasp how they would benefit from all the technologicaladvances, such as electromechanical steering and the elaborate four-linkrear axle. In Germany in particular, advertising that focused on the newGolf’s performance on bends did not at all spell out what value was beinggenerated. Conversely, the press placed more emphasis on perceivedshortcomings in workmanship – such as the appearance of the interior,which certainly does have an immediate and formative impact on brandperception, especially in a brand aspiring to ‘premiumship’. As a result,


what was in fact a genuinely innovative car elicited less than enthusiasticcoverage in Autobild, a popular and influential German automotive publi-cation: ‘[VW’s] love for details is waning’; ‘in terms of its look and feel,it’s a step back, not a step forward’; and ‘development on the Golf V isinvisible to the eye’ (an allusion to the chassis and steering).

When it introduced the iDrive concept, BMW too discovered thatcustomers will only accept innovation if they believe it caters appropri-ately to their needs. Acclaimed by its maker as a trail-blazing innovationwhen the new 7 Series was rolled out in 2001, iDrive did not capture thehearts of drivers, who found it too complicated. BMW’s basic idea hadbeen to tidy up the cockpit while offering more functions and creatingclear hierarchic structures in vehicle control. All secondary functions(such as infotainment, navigation, telematics services and audio/videoofferings) were to be combined as a central functional block. BMW and itscooperation partners managed to design a knob that drivers could press orturn eight ways to control over 500 different functions. The technologywas breathtaking, but the first iDrive system was extremely complex andproved too much for the company’s 7 Series customers. Even youngerpeople with a liking for technology took unusually long to learn to use thesystem – and they are not normally the target group for top-of-the-rangesaloons (which mostly consists of males aged 45 to 67). The niceties of theclever new system were often hopelessly lost on this latter group, whoseaffinity for information technology (IT) is known to decrease with age(Figure 5.3).


20 30 40 50 60 70 80

20%

0%

Regular useof a PC

Age(years)

Key customers forpremium vehicles

40%

Base: German population

Figure 5.3 IT affinity of key customers for premium vehiclesSources: DIW, Roland Berger

Customers’ criticism was taken into account in later versions of iDrive.When the next generation of the 5 Series was introduced, the system wasreworked and simplified extensively. Even so, the BMW system is stillregarded as more complex than comparable top-end command systems.Of all the systems commonly installed in luxury saloons, the combinedinterface model fitted in the Audi A8, for example, is the easiest forcustomers to operate. Such an interface features a combination of buttonsthat control specific functions directly and a knob that can be turned andpressed to access multiple functions (Figure 5.4).

The command system in the new S class (W221) learnt from this objectlesson and focused squarely on the needs of customers. The high-techoperating system is made up of one controller and two 8-inch screens,each in 16:9 format. It governs a whole host of technical, convenience,entertainment and navigation functions that would quickly overtaxconventional forms of user interaction (switches and buttons). On thebasis of extensive customer surveys, the system was designed to be veryuser-friendly. The most important difference is that many functions cannow be operated in a number of different ways, either via the controller,through direct selection buttons, or by pressing buttons on the steeringwheel. Initial tests by the press confirm that the system is indeed intuitiveand very easy to use.


4.0

3.33.1

1

2

3

4

5

6

A 8 Phaeton 5 Series 7 Series

Easy operation of theMMI, good navigation,good radio operation

Good radio operation,air-conditioningcontrolled via hardkeys

Good navigation,command unit wellpositioned

Good navigation,command unit wellpositioned

No numeric keys Too many buttons,display not optimallypositioned

iDrive functionalityunclear, telephoneoperated via iDrive

iDrive functionalityunclear, telephoneoperated via iDrive,too many functions,difficult navigation

Very good

Poor

2.6

Figure 5.4 Convenience of command systems in premium carsSource: SirValUse Consulting (Germany)

The above examples show how tremendously important it is to focus tech-nological development on what customers really want and need. If tech-nology fails to anticipate customers’ expectations, or if customers fail toperceive the value that an innovation generates, sales forecasts will bemissed. Knowing the needs of the target customer segments is thereforebecoming ever more crucial as a success factor in the development of newtechnologies.

Only mature technologies are acceptedAdvances in the field of electronics have helped engineers push back theboundaries of what is technologically feasible again and again. Electroniccomponents lay the foundation for complex applications such as activesuspension, biometric recognition systems and radar-guided cruisecontrol systems. Compliance with laws on emissions or on passengersafety, say, is no longer possible without the use of electronics. Fully 80per cent of all innovations are already based on developments in elec-tronics and software, and the forecast rate of growth for the next five yearsis 75 to 100 per cent (relating to today’s value share in the entire vehicle ofabout 20 per cent). More and more on-board systems, such as active andpassive safety systems, are becoming networked and are merging intoone. This trend, coupled with ever more functionality, is making in-vehicle electronic systems hugely complex. And this in turn makes itdifficult to achieve the required degree of technological maturity beforeinnovations go to market.

A glance at breakdown statistics collated by ADAC, Germany’s auto-mobile association, highlights the impact of this trend. Electronic failureseasily occupy pole position, with a share of approximately 60 per cent ofall breakdowns. If we examine manufacturers’ existing skill sets, a keyreason for this problem quickly becomes apparent. A Roland Berger studyof all leading OEMs reveals that, while electronics accounts for approxi-mately 80 per cent of all innovations, electronic engineers account foronly 14 per cent of these companies’ engineering forces.

An added difficulty is that the complexity of the software developmentprocess is often underestimated. Changes to functionality are often madead hoc, without systematic rigor. Nor has a satisfactory solution yet beenfound to the problem that electronics and software innovation cycles arefar shorter than vehicle model cycles (Figure 5.5). This challenge is set tobecome even stiffer. Future customers will, for instance, no longer settlefor using six-year-old on-board navigation systems or mobile phones (theaverage period to the next model generation) when technology in bothareas has made significant strides in the meantime. Since OEMs


themselves do not have the engineering skills to develop these systems,lifecycle synchronization will necessitate far closer collaboration andnetworking with component and system suppliers.

The innovators among the premium manufacturers in particular face akind of ‘Catch-22’ situation. They are under enormous pressure to satisfythe huge expectations with regard to innovative technologies with everynew model launch. Yet they also have to minimize the risk that preciselythese innovations – 80 per cent of which, as we have seen, have to do withelectronics and software – may not be fully mature when they (literally)hit the road. Immature technologies can naturally do immense financialdamage, with warranty claims and recalls quickly running up a bill intothe hundreds of millions. But they also do serious harm to customer satis-faction (Figure 5.6). Mercedes-Benz knows this pitfall all too well.Investment bank Goldman Sachs estimates that services performed underwarranty totalled around €2,400 for every Mercedes sold in 2004. Despitethe company’s enviable position as technology leader, these qualityproblems leave it languishing in mid-table on customer satisfaction.

By contrast, ‘fast followers’ such as Toyota, Honda and Nissan tend touse established technologies, have far less electronic content overall – andhave far fewer problems as a result. The price they pay is that they havenot yet been able to gain a foothold in the premium segment. Because of


Sales (units)

Sales (units)

Time (years)

Hardware cycle

Vehicle model cycle

Approx. 6 years

Time (years)

Software cycle

Figure 5.5 Comparative view of vehicle model cycles versus hardwareand software cyclesSource: Roland Berger

the high quality and reliability of its vehicles, Toyota remains theindustry’s yardstick for customer satisfaction – a reflection of customers’decreasing willingness to tolerate quality problems. The distance betweenleading brands is eroding all the time. If innovations are found to beimmature at market launch, established market positions can shift dramat-ically at short notice.

Not all technologies become establishedThe purpose of technology roadmaps is to help decision makers in theautomobile industry recognize when what new technologies will be intro-duced (Figure 5.7). However, current developments indicate thatadvanced technologies whose benefits to the customer cannot readily beexplained have not lived up to their makers’ expectations.

What are known as ‘by-wire’ technologies present a classic example.DaimlerChrysler recently withdrew electrohydraulic braking systemsfrom its assembly lines – along with 600 other electronic functions. Why?Because the technologies involved are not sufficiently mature. The valuethey add is difficult to communicate to customers and related system costsare high. Such negative experience will also cause other by-wire tech-nologies to slip down the priority list on development roadmaps, at leasttemporarily.

Yet another advanced technology – the 42V vehicle power system – willalso be directly affected by this turn of events. The demotion of by-wire


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Rated on a scale of 1-1000

Averageacross allbrands

Figure 5.6 Customer satisfaction index, Germany 2004 (selected brands)Source: JD Power and Associates, Germany

technologies eliminates one of the main justifications for such networks,which will therefore suffer the same fate. Innovators in the industry havelong been promoting 42V technology in particular as the future trend inautomotive engineering. Back in the mid-1990s, car makers wereconvinced that the in-vehicle need for electric power was set to risesharply, and that existing 14V power systems would simply no longer beup to the task. The advantages of the new technology were obvious:lighter and less bulky wiring, a more reliable, efficient power supply, andthe opportunity to fit vehicles with all kinds of new functions. The 42Vvehicle power system was to become the platform for innovative develop-ments such as by-wire technologies, electric turbo chargers and person-alized air-conditioning systems.

Despite a very positive echo when the markets were buoyant in andaround 2000, many components suppliers held back. They didn’t reallybelieve the system would make the breakthrough, and they were wellaware that they themselves would have to bear most of the up-frontinvestment in this expensive system. As early as 2000, Bosch forexample voiced concerns that forecasting institutes were being too opti-mistic, contending that 42V would probably not be around before 2010.The current status is that no economical solution can be found toproblems with the technology; that quality risks still exist; that coreapplications that would have needed 42V technology are now off theagenda; and that more efficient energy management has substantially


Interior ElectronicsExteriorBodyEnginePowertrainChassis

2002

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2015

Ceramicbrakes

Electro-mechanicalbrakes

Activechassis

Steer-by-wire

Magnesiumgearboxhousing

Variabletransmission

Particle filter

Otto-engine DI

Hybrid engine

Fuel cellengine

Wheel hubdrive

Hydrogenengine

Metal foams

Steel spaceframe

Plasticbody

Compositematerials

Radar-guidedcruise controlsystem

Aluminum/magnesium

Active lighting

Pedestrianprotectionsystem

Variableinteriors

Smart airbags

Night vision

Bus systems

42V vehiclepower system

Driving onautopilot

Pre-crashsensors

Figure 5.7 Examples of technology roadmapsSource: Automobil-Produktion (publication)

reduced vehicles’ need for power. It is therefore not unlikely that the 42Vpower system will be put on ice for the time being – or will perhaps evendisappear from view altogether.

On a brighter note, development of other technologies whose benefitscustomers clearly understand has been accelerated. The outcomes arereaching the market earlier than expected. One example is the radar-guided cruise control system. Originally expected after 2007, this tech-nology is already available in top-end vehicles, and is even graduallyappearing in mid-range saloons, too.

TRANSITION: THE CUSTOMER AS THE FOCUSOF TECHNOLOGY DEVELOPMENT

From ‘technology creates demand’ to ‘technologygenerates value’

The examples discussed, and even a cursory analysis of the technologylandscape as it stands, prove a clear point: technological development isstill far from focused on the customer. It is hard to shake off theimpression that technology development to date has been based on thetheory that technology creates demand. Accordingly, industry playershave tried to develop whatever appeared technically feasible. Competitivepressure and the trend toward individualization and differentiation havedoubtless also fuelled the individualization of in-vehicle functions andtechnologies.

An examination of the broad diversity of technology that has resultedindicates the vast spectrum covered – and gives an idea of the challengesfaced by OEMs. The latter are, for example, called upon to come to termswith innovative engine technologies such as high-pressure common raildiesel systems and hybrid technology; driver assistance systems such aslane change assistants and adaptive cruise control, complete with radarand video sensors; active body control systems such as active frontsteering and predictive emergency braking; safety-enhancing systemssuch as predictive safety systems and run-flat tyres; weight-reducingmaterials such as steel space frame technologies, carbon fibres andcomposite materials; biotechnology in the context of breathable fabricsand lightweight insulating substances; and even bionics to reduce airresistance and create self-cleaning surfaces.


Since many technologies also compete with each other, OEMs findthemselves confronted by almost overwhelming complexities andspiralling costs. To steer safely around the complexity and cost trap, theywill in the future have to focus more narrowly on key technologies. Incoming to this realization, manufacturers are learning that the ‘technologycreates demand’ approach of the past will not get the job done. They haveunderstood that, to master the challenges of the future, they need anapproach that focuses technology development rigorously on the needs ofthe target customers. Only then can they reduce internal complexitieswhile generating higher revenues by adding greater value for thecustomer.

Customers are indeed willing to pay for perceptible add-on benefits.Whereas buyers in Germany paid an average of around €9,500 for a newcar in 1983, this figure jumped to €15,200 by 2003. The purchase of‘special extras’ accounts for some two-thirds of the difference (Figure 5.8).

Many car makers are now visibly shifting to a new approach. The ‘tech-nology generates value’ approach assesses innovations in terms of severalfactors: the value they generate for customers, their degree of maturity andtheir compatibility with a brand profile, the fit with the product posi-tioning and with current trends in the different technology segments. Thetask now facing decision makers in the industry is to investigate themyriad potential new technologies ahead of them and identify those tech-nologies and technology segments that target customers will accept andpay for.


2003

15,200

Share ofprice riseaccounted forby specialextras

9,500

Rise in price ofstandard model

1983

3,700

2,000

65%

35%

Figure 5.8 Trend in the average price of a new car in Germany (ineuros, adjusted for inflation)Sources: DAT Report, Roland Berger

Ecology, safety and convenience as drivers of technology

In seeking to filter out those technologies that target customers willaccept, it is vital to identify the drivers of technology – those factors thatinfluence customers’ value systems. Daily reports that fossil energyreserves are running out, the threats posed by crime and terrorism, andconsumers’ growing demand for comfort, availability and ease of use (inother words, convenience) have altered our system of social values. In theprocess, three core elements of a new value system have emerged: envi-ronmental awareness, safety and convenience. These core elements of ournew value system are also having a substantial impact on the automotiveindustry, in which they rank as the key drivers of technological devel-opment. Perhaps even more importantly, they serve as the principal filtersin determining whether or not customers accept advances in technology.

In the past, most innovations centred around the driving experienceitself. Following the shift in values, however, it is only logical that threemajor new segments of technology have sprung up around the moreelementary ‘driving’ segment. The three new segments are: ‘the envi-ronment’, which is occupied by hot topics such as particulate filters, high-pressure diesel technology and in particular hybrid engines; ‘safety’,which focuses on such themes as active and passive safety systems, run-flat tyres, adaptive cruise control and the kind of short-range radar sensorsthat only recently went into volume production; and ‘convenience’,involving elements such as automated air-conditioning, heated seats andseat ventilation.

In light of this situation, it is no surprise to discover that the stronggrowth rates which many pundits forecast for the ‘communication’ tech-nology segment (focusing on functions such as DVD players, in-car PCs,internet access, remote troubleshooting and telematics services) have sofar failed to materialize.

Successful technology development that focuses on thecustomer

As we saw earlier, leading manufacturers have woken up to the fact thatthe ‘technology creates demand’ strategy does not produce the desiredresults. They have begun to realize that technology must instead generatevalue. Indeed, a number of highly successful examples show how thisshift of mindset is even now being put into practice to good effect.Analysis of these examples reveals essentially the same success factors ineach case:


� Recognize key trends, technology drivers and changes in customers’value systems at an early stage.

� Identify key customer opinion leaders.� Aim for leadership within the chosen technology segment.� Manage the technology development process stringently with regard

to the selected segment.

The new S class from Mercedes-Benz is one example that, from a techno-logical and strategic perspective, can be categorized as an attempt to‘defend innovation leadership’. Each successive generation of this modelseries has traditionally set a new milestone in innovative automotive engi-neering. DaimlerChrysler’s image and future prosperity are closely tiedup with the market success of the S class. In its role as the brand’s techno-logical standard bearer, the S class affects all of the company’s othermodel series. DaimlerChrysler is therefore compelled to pump hugeamounts of money and effort into research and development work forevery new S class in order to deliver on its brand promise and uphold itstradition as a pioneering innovator. The new S class indeed lives up to thisrole once again and is shot through with all kinds of innovations: anenhanced pre-safe system linked to ESP; radar-guided cruise controlsystem; a braking assistant; night vision equipment, complete with twoinfrared headlamps and a reversing camera whose projected lines facil-itate reverse parking; and a host of other smart new developments. Thismight all sound very futuristic, perhaps even over the top in terms of high-tech wizardry. DaimlerChrysler has, however, learned from the electrohy-draulic brake episode. The lesson reads that high technology will notsuccessfully establish itself unless it clearly generates value in a way thatcustomers understand. On the contrary, it can make a huge dent in thebrand’s quality image if the technology concerned proves to be immature.Accordingly, all the innovations in the new S class have been groupedtogether in a package that very clearly generates value for the customer.DaimlerChrysler calls this package its ‘vision of accident-free driving’.

‘We focus on innovations that yield significant benefits for thecustomer,’ says Thomas Weber, the member of the board of managementin charge of research and technology at DaimlerChrysler. ‘In other words,not everything that is technically feasible finds its way into our cars.’Against this background, the new technologies fitted in the S classperfectly match both Mercedes-Benz’s specific brand promise (which hasalways been associated with advances in safety technology) and themodern value system in which ‘safety’ is a core element. Presscommentary, such as that from the popular Autobild journal, confirms that


the developers have struck the right chord: ‘In the new S class, driverstoday have a firm grip on the technology of tomorrow.’

Renault’s example is especially impressive. It illustrates the vastpotential even for volume manufacturers to sharply boost their brandimage and carve out a more distinctive profile, provided they correctlyanticipate what customers expect of new technologies. Although Renaulthas not been regarded as a technology leader in the past, top grades in theEuro-NCAP crash test gave a sudden and significant lift to the company’sbrand image. This example, too, clearly underscores the success factorsfor technology development in the automotive market:

� Recognize customer trends at an early stage. Renault was very quick tospot the tremendous importance that customers attach to the issue ofsafety – and the opportunities that a positive link between this themeand the Renault brand would open up.

� Identify key customer opinion leaders. Unlike other car makers,Renault committed to collaboration with Euro-NCAP from thebeginning, an astute move that paid handsome dividends. Excessivelycomplex and in some cases non-objective test criteria conspired with alack of lobbying muscle to prevent other manufacturers from standard-izing their test procedures. Backed by strong support from the Britishgovernment, however, Euro-NCAP established itself as the leadingEuropean and OEM-independent organization for passive safety. Bycleverly marketing its test results for passenger safety, and morerecently for pedestrian protection, Euro-NCAP reaped the benefits ofhigh-profile public attention and strong credibility. Equally cleverly,Renault – whose results put it at the top of the table – succeeded in co-opting this credibility for its own marketing ends.

� Aim for leadership within the chosen technology segment. Right fromthe outset, Renault set itself the strategic goal of becoming the firstmanufacturer to earn a five-star rating in the Euro-NCAP crash tests –a goal it achieved in 2001 with the Renault Laguna. To realize thisambition, the company embedded Euro-NCAP’s test procedures in itsproduct specifications and even made them a leading strategicguideline across all levels of the enterprise. Following the samerigorous logic, Euro-NCAP became a core component of Renault’smarketing and communication strategy. Since then, all other carmakers have likewise started to feature positive Euro-NCAP testresults as a kind of ‘quality seal’ in their advertising campaigns. Evenso, test results show that some premium vehicles have been unable toachieve five-star ratings. In one specific case, the vehicle in questionundoubtedly had a superior safety concept and actually outperformed


a number of the crash test criteria. The safety concept was not appliedconsistently enough, though. Nor was it adapted early enough to meetthe specific criteria valid for Euro-NCAP tests. Below-par test resultswere therefore inevitable. Strong brand positioning and a substantialpremium bonus will now be needed to plug the hole that has been tornin customer opinion.

� Strictly manage technology development. Renault – not exactly abyword for innovation leadership in the past – has consistently chan-nelled the bulk of its sizeable development spend into the ‘safety’ tech-nology segment. The company has consciously refrained fromspreading itself too thinly by also concentrating on other advancedtechnologies. Interestingly, although safety had always been animportant issue to both customers and manufacturers, not all carmakers grasped the significance of the Euro-NCAP crash tests to thesame extent in the mid- to late 1990s. At the time, Euro-NCAP wasitself striving to be accepted by the automotive industry. The perma-nently increasing importance of safety themes in customers’ valuesystems thus generated a classic win–win situation for both parties. Inthe end, Euro-NCAP attained a leading position as an independenttesting organization for passive safety, while Renault’s ‘lead role inpassive safety’ gave a lasting boost to the car maker’s brand image(Figure 5.9).


19971996 19991998 20012000 20032002 2004 2005

Laguna MeganeLagunaVel SatisEspace

ModusMegane-CC

TouranA6

GolfTouareg

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Renault

VW/Audi

Mercedes

BMW

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Mercedes

Figure 5.9 Euro-NCAP test results (passive crash tests)Sources: Euro-NCAP, 2005; ADAC

Yet another manufacturer that has understood the power of customer-focused technology strategies is likely to give sleepless nights to theincumbent technology leaders in the future. Toyota, already the front-runner in terms of growth, quality and profitability, will now also gainrecognition as a technology leader. Toyota is therefore leveraging thehybrid engine technology to take the lead in the ‘environment’ technologysegment. This core area is of crucial importance to customers. Zooming inon hybrid engines as an area of core competence, Toyota is seeking tocultivate an emotional image for the Lexus brand in particular.

Public discussion of climate change, record oil prices and particulateemissions are just some of the issues that have sensitized consumers toecological matters, leading to calls for more environment-friendly cars.Unlike Japan’s pioneers of hybrid technology, European manufacturershave elected to rely on diesel engines. Any other research they do concen-trates on fuel cell and hydrogen technologies, neither of which will beready for volume production before 2015 to 2020. To date, manufacturersand experts have led a highly technical and often polemic debate about theindividual strengths and weaknesses of diesel, hybrid, natural gas andother comparatively ‘green’ engine technologies. Customers haveperceived the heated debate as disconcerting – it has not exactly rein-forced their desire for environment-friendly technologies. In the UnitedStates, tighter emissions legislation and public subsidies have fostered atrend toward hybrid vehicles that European makers quite simply over-looked for far too long. More than 80,000 hybrid autos were sold in theUnited States in 2004, over 50,000 of which were Prius models fromToyota. Market researchers expect the global market volume to rocket toover 900,000 hybrid vehicles by 2010 (Figure 5.10).

For the longest time, the automotive industry’s corporate HQs inEurope and the United States insisted that two engines would be tooexpensive and too heavy. That made them hesitate to join the fray andactively address the hybrid issue. Meanwhile, Toyota had swiftly recog-nized what customers wanted and pressed ahead with the development ofhybrid technology. It has since gained a several-year lead over theincumbent technology leaders. When the hybrid engine was first intro-duced in the Prius in 2000, the vehicle was derided for its stuffy designand poor driving dynamics. However, by the time the Lexus RX400h wasunveiled, if not before, this attitude had changed completely. ‘Runssmoothly, is great fun to drive and even appeases your environmentalconscience’, is how Autobild summed up its test drive experience – encap-sulating to perfection what customers expect of hybrid vehicles.

Ever since Hollywood stars such as Cameron Diaz and Harrison Fordrolled up to the Oscar awards ceremony in a hybrid Prius, and ever since a


Honda Insight Hybrid effectively shared top billing with John Travolta andUma Thurman in their movie Be Cool, it is obvious who Toyota has iden-tified as ‘key customer opinion leaders’. The Japanese car maker alsomanifestly has a clear strategic focus on leadership in this technologysegment, and stringently manages its technology development programme.Toyota has, in other words, seized this opportunity with both hands.

Just when Europe’s incumbent premium brands such as Mercedes wereindulging in a spot of navel-gazing regarding quality and product port-folio issues, Toyota launched an assault on the Old Continent with itsLexus brand. Armed with a powerful arsenal – a more attractive,European-style design, new technology (with hybrid technology posi-tioned as core competence for the Lexus brand) and top rankings onquality and service – the Lexus is gunning to narrow the gap on Europe’shome-grown premium brands. Within the space of five years, all top-of-the-range Lexus models are to be fitted with hybrid technology.

From bitter past experience with the Lexus brand in Europe, Toyotaknows full well that the climb to premium peaks will be a long andarduous one. Its only chance is to beat the European premium car makersin the arena of leading-edge technology. Accordingly, the group pumpedover €5.5 billion into new technologies in 2005. Hybrid technology is acentral tenet of Toyota’s overall strategy, which aims for market lead-ership by 2010. And so far, the Japanese company has achieved every goalit set itself. That is why the automotive world has to sit up and take notice.Now that exciting, innovative cars are no longer necessarily ‘made in


3168

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0.1 0.1 0.3 0.7 1.2 1.30 0 0.1 0.4 1.4 2.7

Worldwide W. Europe Share of overall market, in %

Figure 5.10 Market forecast for hybrid vehicles (in thousands of units)Sources: Automobil-Produktion (publication), Freedonia Group, Global Insight

Europe’, Toyota definitely has the potential to rearrange the existingpecking order.

European and US car makers are making impressive efforts to catch up.A series of new models have already been announced for the years ahead.Ford has fitted a hybrid engine in the Escape and four more models will hitthe market within the next three years. General Motors (GM) andDaimlerChrysler – neither of which could, until recently, be described asardent believers in hybrid engines – are working together to develop aneven more efficient technology which is due out in 2007. BMW is also inon this collaborative venture. Audi is working flat out on a hybrid enginefor its new Q7 SUV, and even Porsche is considering the option of ahybrid solution for its Cayenne SUV.

Hybrid technology is not the only field where the battle for customers isheating up, however. European – and especially German – manufacturers,keen to roll up the American market with diesel technology, are even nowpreparing to launch stage two of their ‘diesel assault’. Still plagued by anegative environmental image, diesel is as yet only a footnote to the US’sautomotive success story and accounts for just 3.2 per cent of the market.But not for much longer, the Europeans hope. Over 40 per cent growth insales of diesel vehicles in the past six years has spurred them on, as did theprospect of diesel fuel with significantly lower sulphur content, due out inautumn 2005. Accordingly, vendors such as VW, Audi, BMW, Nissan,Ford and – leading the charge – DaimlerChrysler are thinking hard abouthow to increase market share with diesel cars.

The sophisticated exhaust gas treatment in DaimlerChrysler’s brand-new ‘BlueTec’ technology reduces nitrogen oxide emissions by as muchas 80 per cent, bringing them well below even California’s ultra-strictspecifications. BlueTec technology depends on the availability of low-sulphur diesel fuels. It also requires AdBlue, a urea solution, to be toppedup at regular service intervals. Yet despite these limitations, the tech-nology now presents serious competition to hybrid engines on two counts:fuel consumption and environment-friendly properties. DaimlerChryslerhas thus announced its intention to hit the US market with four newmodels armed with BlueTec technology. The first will be the E320, whoseroll-out is timed to coincide with the launch of low-sulphur diesel. Moreammunition for the diesel assault could also come from GM, the numberone car company in the United States and the world. Combining tech-nology derived from the GM-Fiat powertrain joint venture withcompletely new developments, GM is planning a diesel offensive of itsown in 2008.

Optimistic market forecasts assume that diesel cars will raise theirmarket share to as much as 7.5 per cent – or 1.3 million vehicles – by


2012. It will therefore be exciting to see which of the two technologies,hybrid or diesel, makes the running in the medium term. In the light ofpent-up customer demand for greener autos, both alternatives exhibitplenty of upside potential.

All these examples emphasize the importance of rigorous technologymanagement that focuses on the real needs and wants of customers – astrategy that will gain further ground in the future. The introduction ofEuro-NCAP crash tests first caused a stir in the ‘safety’ arena. ThenToyota brought hybrid technology into the ring – and threw establishedtechnology leaders back on the ropes. One thing thus becomes abun-dantly clear: companies that swiftly and accurately interpret new trendscan significantly improve both their market positioning and their brandimage. Conversely, if trends are anticipated wrongly or too late, targetedrevenue potential can be squandered while complexity and costs gothrough the roof. Any attempt to use high technology as a differentiatorwithout taking into account customer benefits is doomed to failure. Thisis another lesson we can learn from the above examples, such as thetrajectory of the 42V vehicle power system. Current debate surroundingenvironmental issues confirms the point: innovative engine technologyand environment-friendly fuels alone will not get cars out of theshowroom. Customers expect a coherent all-round package demon-strating the vehicle’s driving dynamics, whether it is fun to drive, itsimage, safety and environmental friendliness.

For car manufacturers, the key success factor in the future will be‘customer-oriented technology management’. Manufacturers must askthemselves whether their inherited approach to technologymanagement is up to the challenges that the future holds. Is thecustomer genuinely the focus of attention on every level? The exampleswe have seen clearly show that, even within one and the same company,the line between success and failure, between dream results and disas-trous performance, can be very fine indeed. This being the case, it isfair to assume that, while car makers have in principle understood theneed to focus all technological development squarely on the customer,they have not yet put this principle into practice systematicallythroughout their entire organization.


OUTLOOK: THREE CORE ELEMENTS OFCUSTOMER-ORIENTED TECHNOLOGY

MANAGEMENT

Many manufacturers will have to review the technology strategies theyhave already approved, and possibly even rewrite them to focus themmore strongly on the customer. Strategy is not the only thing that needs tobe examined, however. Companies must also query whether their existingorganizational structure and processes are conducive to realizing thestated focus of their technological development across all new vehicleprojects, levels and regions. The stated technological focus must beapplied stringently but it must also be adaptable to the specific require-ments of different model series, for example. Nor is it enough for manu-facturers to revector only their internal organization. They must alsoreconfigure the changing structure of their supply network.

Car makers must not make the mistake of applying their technologymanagement strategy to actual technology development alone. Tosuccessfully master the challenges of the future, companies mustintroduce an integrated, customer-oriented system of technologymanagement that is made up of three key building blocks (Figure 5.11).

The technology or product strategy ensures agreement with overallstrategy and market positioning. It transforms trends and customerrequirements into vehicle attributes and technologies that shape the brand.


Customer-orientedtechnology

management

Operationaldesign

Networkmanagement

Technology/product strategy

Customerrequirements

Key trends

Figure 5.11 Key building blocks of customer-oriented technologymanagementSource: Roland Berger

This strategy also defines the precise technologies and innovations thatcan and should be used to differentiate a brand and product from rivalbrands and products. The target value chain structure is then mapped outon this basis. The secret of successful transformation is to focus devel-opment rigorously on the value to the customer – and to verify this valueorientation for every detail and on every level.

The operational design phase aims to systematically implant or embeda customer’s-eye view of the car maker’s development organizationacross every level, division and vehicle project. Traditional, function-oriented value chain structures must be reoriented to focus on the brand-shaping vehicle attributes and customer needs. These structures must beenabled to recognize and respond quickly to emerging trends. Changemust also come to the development process. In the past, the developmentapproval process was focused on individual components. Now, specifica-tions of defined vehicle attributes must be added. Also, the developmentorganization must have the skills and resources it needs to rise to futurechallenges and cope with the ever faster pace of innovation. Criticalknowledge must be available within the organization.

Network management will play a very prominent role in the future.More and more links in the value chain will be outsourced to suppliers andservice providers. This will leave the manufacturers free to concentrate onthe brand-shaping elements of the value chain. But it is also a pragmaticway for OEMs to maximize productivity and exploit cost advantagesdespite their own limited resources and lack of expertise in innovativetechnologies. In the future, however, this process will slow downnoticeably, and will not go as far as was expected until recently (Figure5.12). The flood of new models has already passed its high-water mark.With productivity gains now being eroded to some degree by higher coor-dination overheads, manufacturers face considerable overcapacity andstrive to build up critical knowledge resources in their own organizations.

Even so, the shift in the value chain between manufacturers andsuppliers will still be significant. New business models will result thatestablish car makers and their external suppliers as strategic partnerswithin tightly meshed networks. For the car makers, the main successfactors will be choosing the right partners and managing the resultantnetwork effectively as a virtual company. The individual partners willoperate different business models, have different levels of vertical inte-gration, possess different competences and be responsible for differentareas. Ensuring that such a network focuses consistently on one and thesame customer-oriented strategy is a highly complex task. Efficientnetwork management will be crucial to keep auto makers competitivewhile constantly adapting to current and anticipated market changes.


Customer-focused technology and product strategies

It will take a completely new strategic approach to enable automotivefirms to concentrate strictly on customer value. Traditionally, their devel-opment organizations have been focused on technical components. As aconsequence, approaches designed to differentiate themselves from thecompetition have enabled companies to design and market precisely thesecomponents in innovative ways. The problem is that customers do not buytechnical components. They buy vehicle attributes such as drivingdynamics, performance, comfort and safety. To succeed in the future,development must line up with customer perceptions and focus onconcrete vehicle attributes (Figure 5.13).

This focus on vehicle attributes is at the very core of the technology andproduct strategy. All other aspects of the strategy build on this foundation.Generally speaking, an integrated, customer-oriented technology andproduct strategy will break down into four distinct levels (Figure 5.14):

1 Spot changes in customer requirements at an early stageIn the future, it will be vitally important to monitor changes in customers’requirements and keep a close watch on emerging core trends. Most carmakers know the needs of their target customers and have positioned theirbrands and products accordingly. Any such positioning is by nature static,however. It works fine as long as no fundamental changes occur, forexample in the value system of the customers, and hence in customers’perceived requirements.


1990 2002 2015

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Figure 5.12 Trend in value chain structures (in € bn)Sources: Interviews, Roland Berger Engineering Study

When new trends begin to impact the market, change comes about.Established market players nevertheless often lack the systematic‘sensors’ that would allow them to detect such shifts early on. That is whymany of them often respond very late. Manufacturers who are intent ontransforming their image generally adopt a much more aggressive stance.As soon as a new blip on their radar screens signals a change in customer


Past/presentComponent-oriented

Differentiation

FutureAttribute-oriented

• Air-conditioning system

• Heated rearview mirrors

• Four-cylinder engine

• ABS

• 5-gear automatictransmission

• Aluminum radiator hood

• etc.

• Comfort, ease of use

• Overall vehicle design

• Environmental friendliness

• Value retention

• Driving dynamics/handling

• Safety

• Engine performance

• Interior design

• Infotainment

Figure 5.13 Focus of development – shifting from a componentorientation to a focus on vehicle attributesSource: Roland Berger Engineering Study

• New core trends• Factors that

influence trends

Spot changes incustomer requirementsat an early stage

Focus vehicle/brandattributes on thecustomer

Focus newtechnologies on addedvalue aimed at specifictarget groups

Adjust value chainstructures

Identification ofvehicle attributes thatshape the brand

New technologiesthat generate valuefor target customers

Concentrate on valuechain elements thatshape the brand

Figure 5.14 Steps in technology and product strategy developmentSource: Roland Berger

requirements, they seize the opportunity and rigorously focus their tech-nology strategy on this trend – witness the examples of Euro-NCAP andhybrid engines.

All car makers essentially face the same challenge: to wade through theflood of short-lived trends and filter out those ones that will have a lastingimpact. This requires transparency and a systematic approach.Transparency is needed in respect of macroeconomic trends thatsuddenly begin to drive technology and so affect the activities of themarket. But manufacturers also need a clear overview of opinion leaders,such as newly emerging technology institutes (like Euro-NCAP) andmarket research institutes (like JD Power, whose analyses of customersatisfaction are gaining more and more importance). Transparency isequally essential with regard to the media, such as journals whoseregional influence is growing (Auto Motor Sport is a good example inEurope), and concerning multipliers, such as the Oscar awards scenarioin the case of Toyota’s hybrid vehicle.

A systematic approach is necessary to wean firms off the kind of ad hoc,‘gut feeling’ models that have been prevalent in the past. Car makers mustinstead learn to regularly track familiar and new drivers and trends. Inmany cases, organizational deficiencies are one of the reasons that infor-mation that could have a critical influence on key decisions never makes itfrom Marketing to Development – or that the latter often rejects any suchinput. Again, the reason for these deficiencies is mostly that customerorientation has not been implanted in technology management at astrategic and organizational level, or that customer orientation has not yetbecome the sole focus of the development process across all levels and allrelevant divisions. The fact that one and the same manufacturer candeliver both glowing successes and abject failures of technologymanagement substantiates this hypothesis: the ability to realize acustomer-oriented technology management strategy is obviously there. Itjust isn’t everywhere – yet.

2 Transform customer demand into brand-shaping vehicleattributesOnce a car maker knows what its customers need and want and has posi-tioned its brand values in line with this data, the requirements placed onthe product – the vehicle – can be defined in a systematic ‘cascade’process. The first step is to nail down exactly what customers expect of thebrand, what vehicle attributes will shape the brand in accordance withdefined brand values, and what will set the brand apart from itscompetitors. To this end, vehicle attributes must be grouped into logical


clusters and then analysed and prioritized to determine their relativeimportance to the brand profile and their emotional or rational nature(Figure 5.15). This exercise must be conducted on the basis of a clearlydefined target group for each model series.

The next step is to transform brand values into sets of vehicle attributes.The attributes themselves must be such that they can be experienced by thecustomers, generate value for them and clearly differentiate the vehiclefrom other vehicles. Once all vehicle attributes have been defined, it is timeto decide which technologies and innovations are best suited to realizingthem. The technologies selected must be clearly assigned to the corre-sponding vehicle systems. Based on these defined guidelines and theirintended mode of functioning, the final step is to translate the requirementsplaced on these systems into the language of development: that is, intotechnical specifications. This is the crux of the whole process: theconversion of customers’wishes into technical specifications. After all, notevery abstract customer perception can be mapped one-to-one onto adetailed technical description and measured in terms of physical units.

A concrete example helps illustrate this four-step process (Figure 5.16).The figure shows how a premium manufacturer converts the brand valueof ‘sportiness’ into a vehicle attribute that drivers can experience, namely‘excellent handling through superior traction in all weathers’. Translatedinto the language of development, this attribute is realized in part through‘optimal load distribution and superb grip’. The innovative technology


Emotional

RationalLow(minimum standardfor premium vehicles)

HighImportance for brand differentiation

Valueorientation

Valueretention

Environmentalfriendliness

Safety

Info-tainment

Drivingdynamics

Comfort, ease of use

InteriorEngineperf.

Design

Figure 5.15 Positioning of vehicle attributesSource: Roland Berger

‘electrohydraulic suspension control’ is selected to achieve this objective.Once this technology has been pinpointed, it is then possible to draw upthe specifications for the ‘suspension and damping’ systems.

The extent to which marketing requirements are translated smoothly andcoherently into the language of development varies considerably frommanufacturer to manufacturer. Glitches in the process lead to situationswhere vehicle attributes do not turn out the way they were intended. Insuch cases, they may then fail to satisfy customer expectations.

3 Systematically generate customer-focused innovationsAs we have consistently argued in this chapter, new technologies andinnovations will be well received by the market only if they fit the relevantbrand image and line up with customer requirements. They must alsosharpen the contours of the brand profile and distinguish it from rivalbrands. These fundamental principles dictate a number of consequences ifa company systematically wants to generate innovations that will meetwith customer acceptance. One consequence is that a selective approachto innovation is imperative. Not every new technology will fit a carmaker’s brand profile. It should also be obvious that technology strategies


Customer requirements

Brand values

Vehicle attributes

Technologies

Systems

Excellent handlingin all weathers

Electrohydraulicsuspension control

Suspension/damping systems

Sportiness

reflected in

achieved by

integrated in

Figure 5.16 Translating what customers want into product specificationsSource: Roland Berger

must also vary as a function of manufacturers’ differing brand values. Iftechnology strategies are too similar, the differentiation potential dimin-ishes. This erodes customer loyalty, causing pressure to be exerted via thelever of price. Another consequence is that innovations and technologiesmust be developed with a strong focus on customer requirements,customer value and customer acceptance. The third aspect in the processof generating innovation is the manufacturer’s own view. In order to beprofitable, car makers must be able to persuade customers to pay apremium that covers the considerable expense incurred in developing anincessant stream of new innovations. Taken together, these three aspects –the brand fit, the benefit to the customer and the benefit to the maker – arethe core filters to determine whether or not particular innovations alignwith a given brand.

Appropriate innovations can, of course, only be generated systemati-cally if a systematic process is in place. This process consists essentiallyof three steps in which innovations are pooled, evaluated and selected(Figure 5.17). The innovation pool, a repository for all of a company’sinnovative ideas, receives input from three sources. First, it serves as astore of all existing innovative ideas. Second, it is fed by the systematicanalysis of factors such as core trends, drivers, opinion leaders,competitors and changes in customer requirements, as well as by theresultant identification of future innovation deficits. Third, input isderived from technology roadmaps, which indicate when what technologywill probably hit the market. As we saw earlier, these roadmaps them-selves require upstream filters to detect changes in customers’ valuesystems. They must never be the product of an obsession with technologyfor technology’s sake.

To filter suitable potential technology projects out of the innovationpool, the brand fit, the value to the customer and benefits to the makerare evaluated in the second step. The third step is to prioritize the attrac-tiveness and technological positioning of the candidate projects iden-tified in step two. At this stage, potential projects are either rejected orselected and cleared for development. This systematic approachensures that the new technologies and innovations selected for imple-mentation will indeed generate value in a way that customers canunderstand and are willing to pay for. Also, this process will ensure thateach selected development contributes to the sharpening of the brandprofile. The internal impact in terms of technical optimization, cost,quality and internal processes, for example, is also rendered transparentat this point.


4 Align the value chain with the technology strategyOnce initiated, the customer-oriented technology and product strategymust be applied consistently across the entire value chain. It is the OEM’sresponsibility to ensure that customers will perceive the brand-shapingand differentiating vehicle attributes in line with the brand promise. Forthis reason, it is important to identify those elements of the value chainthat have an impact on shaping and differentiating the brand, and thosethat do not. The former are part of the car maker’s core competence andshould therefore be kept in-house. Activities that make little or no contri-bution to the distinctive brand perception are generally ideal candidatesfor outsourcing to suppliers. In the latter cases, the car companies canbenefit from more efficient processes, focused product portfolios, lowercomplexity and structural cost benefits often enjoyed by externalspecialists. Essentially, every system and every component must beexamined to determine the extent to which it influences the characteristicsof the brand. This exercise results in the manufacturer’s target value chainstructure (Figure 5.18).

During implementation of this strategy, two processes run in oppositedirections at the same time. On the one hand, the car maker outsourceslarge chunks of the value chain – those elements that do not influence thebrand perception – to suppliers. On the other hand, core competencies andcritical expertise are insourced. This trend is born of many car makers’painful experience that external suppliers often dominate areas ofexpertise that are crucial to those attributes that make a brand so


Create/conceive innovation Evaluate innovative ideas Select innovations

Sources:

• Existing innovative ideas

• Conclusions drawn frominnovation gaps

• Comparison with roadmaps

Filter:

• Does it fit the brand?

• Does it benefit the customer?

• Does it benefit the manufacturer?

+

-Slow follower Innovator

Technology position

+

-Slow follower Innovator

Technology position

Innovation pool

Figure 5.17 Customer-focused innovation processSource: Roland Berger

distinctive. Today, the brand-shaping attributes of products and tech-nologies in the various systems and components are often generated byelectronics and software. Chassis control systems, powertrain and motormanagement systems are just three examples, and the knowledge behindthese systems and components often lies with outside suppliers.Moreover, since little progress has been made in standardizing hardwareand software platforms, such suppliers are far from interchangeable. Thissituation highlights how important it is to brand image for manufacturersand suppliers to collaborate closely in tightly woven networks.

Forms of operational design

Once core competencies have been defined and the value chain structurehas been designed to match, the next challenge is to ensure that thecompany’s technology and product strategy can generate the expectedbenefits in practice. To make sure that vehicle attributes defined on thebasis of customer requirements and brand values will realize in models asexpected, car makers have begun to give their development activities afunctionality focus. Depending on their individual philosophy or thedegree to which they apply this strategy, manufacturers adopt a number of


Driving dynamics

Interior design

• Brandcharacteristics

• Customer benefit• Differentiation

Impact on brand character.: Strong

Attributes

E/EInterior BodyChassis Engine

Avg. Weak

Engine performance

Environm. friendliness

Safety

Quality

Ease of use

Irrelevant

Projected impact of individual systemson brand characteristics

Figure 5.18 Impact of vehicle components on brand characteristics(example)Source: Roland Berger Engineering Study

different approaches to operational design. There are, however, threeorganizational forms that are most common (Figure 5.19).

1 Component-oriented development organizations drivecomplexityVehicle attributes that customers actually perceive – such as ‘sportiness’– areproduced not by just one component, but by the smooth interplay of severalcomponents. In a traditional development organization, which is component-oriented, each line function supplies isolated components as its contributionto the vehicle project. The project team then has to try to put all the systemsand components together in a way that produces the desired vehicleattributes. Given the multitude of systems (especially electronic systems)that have to dovetail perfectly in today’s vehicles, delaying integration untilthis late stage often causes problems and makes projects unmanageablycomplex. Since each individual project is unique and therefore has its ownlearning curve, it becomes difficult to realize the brand-shaping vehicleattributes consistently across all product lines. It is not unusual for differentprojects to end up reinventing already defined attributes.

2 Functional teams reduce complexityAlthough this model seeks to sharply reduce the complexity of a vehicleproject, it is still based on the traditional ‘geometric’ development


Project responsibilityLine responsibility

Traditional component-orienteddevelopment organization

Line functions supplycomponents; vehicle attributesare created in the vehicle project

InteriorChassisBody

Vehicleproject

Attributex1

Attributex2

Attributex3

Reduced-complexityorganization

Functional teams supplymodules; vehicle attributes arecreated in the vehicle project

Attributex1

Attributex2

Transformed developmentorganization

Vehicle attributes are created inthe lines; vehicle projectintegrates vehicle attributes

Attributex

Attributey

InteriorChassisBody

Vehicleproject

ComfortDrivingdynamics

Passivesafety

Vehicleproject

Figure 5.19 Different organizational approaches to integrating vehicleattributesSource: Roland Berger Engineering Study

organization. Line functions team up to build functional subteams that handover finished modules or submodules to the vehicle project. Subteams areresponsible for bringing the components contained in modules in line withdesired vehicle attributes. The approval of the functional attributes of themodule is also placed in their hands. The attribute ‘excellent handling’, forexample, could mean that the electronics unit gets together with the power-train unit to test and fine-tune the interplay between ESP sensors and themotor management system. The finished module is then handed over to thevehicle project, which integrates it with the other modules. Though thismodel certainly does reduce the effort within the vehicle project itself, inter-faces remain a problem and complexity remains high. The main benefit isthat it can often be applied within the confines of traditional organizationalforms, in effect giving employees a ‘soft’ introduction to new ways ofworking and new challenges. The residual threat remains, however, thatfailure to coordinate up-front on the integration of individual modules inhigher-level systems may cause the intended vehicle attributes to be missed.

3 Function-oriented development organizations guaranteecustomer focusThe more important it becomes to carve out a distinctive brand profile –and hence to focus rigorously on customer requirements, brand values andvehicle attributes – the more carefully companies must think about how totransform their development organization into a function-orientedstructure (Figure 5.20). It follows that premium manufacturers inparticular must tackle this approach head on.

Wherever a function-oriented development organization exists, allaspects of the integration needed to create specific vehicle attributes canbe performed within the line and then handed over to the vehicle project asa ready-made system. The driving dynamics unit, for example, mightdevelop and integrate everything needed to deliver the attribute ‘excellenthandling’ from start to finish. This approach makes vehicle projectsmarkedly less complex, while ensuring that every unit that develops a newvehicle model builds on a common understanding of customer require-ments, brand values and vehicle attributes. At the same time, the use ofthis approach on different vehicle projects over time helps the companyaccumulate a wealth of experience – all of which enables the technologyin question to permanently improve and mature.

Development processes must, of course, be adapted at the same time asthe development organization. These processes should be focused on thevehicle attributes from the earliest phases of development, and must thenretain this focus from beginning to end (Figure 5.21).



Chassis

Axles

Brakes

Suspension

Driving dynamics

Acceleration and braking

Handling

Vibration

Interior

Seats

Doors

Cockpit

Interior design and comfort

Driver and passengerergonomics

Infotainment

Haptic/visual appeal

Original focus Brand value-oriented

Example 1

Example 2

Figure 5.20 Focusing the development organization on brand-shapingvehicle attributesSource: Roland Berger

Vehicle integration

Systems integration

Module testing

Vehiclespecification/design

Specification ofvehicle attributes

Module design

Component testingComponent design

Module realization

Component-specific approval process,complemented by approval of vehicleattributes

Focus on the specification of vehicleattributes instead of component attributes

Focus on components Focus on vehicle attributes

Figure 5.21 Focusing the development process on vehicle attributesSource: Roland Berger

At present, the development approval process is usually still carried out atthe level of specific components. To achieve the desired focus, however,approvals must also be granted for complete vehicle attributes. Theseattributes must be clearly defined in advance. And that is no easy task,bearing in mind that customers’ perceptions must be translated into thelanguage of development on such a detailed level that they ultimatelydeliver precisely the desired attributes – and leave no room for subjectiveinterpretation.

Yet another challenge stems from the fact that vehicle attributes shouldnot merely embody a car maker’s general brand values in the same wayacross all product lines. They must also reinforce the individual ‘person-ality’ of each and every product line. This requirement is usually accom-modated by setting up a core strategy unit in the development department.In close collaboration with marketing, this unit prescribes the technologyand product strategy and determines exactly which innovations fit thebrand in general, and which fit the individual product lines in particular. Italso defines the brand-shaping and differentiating vehicle attributes, sothat core competencies can be staked out and the value chain strategydrawn up for the development process. To strengthen the unique identityof the individual product lines, today’s rather case-by-case project organi-zations should be transformed into more formal units within the devel-opment organization. If a company goes a step further and merges relatedproduct lines in a sensible way into such units, it also becomes easier toharmonize vehicle architectures and to introduce modularization and stan-dardization strategies.

BMW is regarded as a pioneer in designing brand-shaping value chainstrategies, and in focusing its development organization on vehicleattributes. BMW assesses the importance to the brand of every module inevery vehicle. It then focuses its value chain strategy accordingly. Theway in which development is organized has likewise experienced far-reaching changes. Having singled out the ‘interior’ as a brand-shapingvehicle attribute that is crucial to the BMW brand, the company extricatedthis unit from its body unit and further transformed its chassis unit into anew driving dynamics unit.

Networking closely with external partners

Changes in the supply network can be linked to three main drivers thataffect the network concurrently but in different directions.


1 Value chain elements that do not contribute to brandcharacteristics are increasingly being outsourcedOne obvious driver is manufacturers’ stated aim of concentrating on thebrand-shaping and differentiating elements of the value chain. This is theircore competence. As a consequence, elements that do not contribute to thebrand characteristics are increasingly outsourced to suppliers. Indeed,entire modules or systems encompassing extensive content all the wayalong the value chain are being farmed out, involving for examplepurchasing, production, assembly, logistics and integration tasks. As aresult, various forms of collaboration are emerging depending on the indi-vidual module or system, and depending on the individual scope ofresponsibility assumed by the supplier.

2 Brand-shaping value chain elements demand fairpartnershipsThe second driver is rooted in many manufacturers’ belated realizationthat they have little or no core expertise in-house to cope with electronicand software functions and the integration of them. In theory, car makerscan quickly find a solution in the discipline known as ‘insourcing’. Inpractice, however, the road to effective insourcing is a long and difficultone. Suppliers are naturally reluctant to hand over their module or system-specific expertise, precisely the expertise that has often given them adominant role in innovation and in creating the brand characteristics.Close networking on both sides offers a way out of this dilemma.

OEMs depend on suppliers to realize defined brand characteristics, forinstance by programming brand-specific attributes into the motormanagement system. Conversely, suppliers are obliged to align theirmodules and systems with the brand-specific vehicle attributes dictated bythe OEM. They must therefore engage in fine-tuning and any number ofminor coordination loops involving other systems in order to producebrand-compliant vehicle attributes. Both parties are thus forced to open upto each other. OEMs must disclose their brand and differentiationstrategies and information on targeted vehicle attributes to their suppliers.The latter must in turn contribute their intellectual capital – that is, theirtechnological and innovation competence. It is thus vital for both sides tocommit to a fair, trusting partnership that offers a long-term strategicperspective.

The third driver derives from the fact that vehicle model lifecycles are‘out of synch’with electronic and software development cycles, as we sawearlier (Figure 5.5). Electronic components and software are developed atsuch a fast pace that certain modules and systems – such as navigation


systems, telephones and entertainment systems – will need to be upgradedwithin a vehicle model lifecycle, and integrated in existing vehiclesystems without disrupting functionality. OEMs lack some of the compe-tencies needed to handle this challenge and would therefore be unable tocope. Again, therefore, they have little choice but to network closely withsuppliers, nurturing long-term partnerships in order to ensure thatupgrades and updates go ahead smoothly.

3 Competences and competitive capabilities demandtight networkingSince it makes sense for the owner of the know-how to also play the roleof process leader, suppliers have to shoulder extra integration work, forwhich they too must build up expertise. To meet this challenge, Bosch, forexample, launched Bosch Engineering as a subsidiary company. Boschused to supply ready-made control systems and associated software forengines, transmissions and braking systems as separate modules. Now,Bosch Engineering pools the expertise needed to integrate these systems,and sells this service to OEMs. The Bosch subsidiary brings together theengine, brake and transmission controllers and hands them over as a self-contained system to the customer.

The need for access to innovative skills and the need to remaincompetitive compel OEMs to compete with each other to find the bestpartners. It is therefore necessary for OEMs to cement the long-termloyalty of top-flight suppliers. Depending on the precise value chainlinks that have been assumed by the supplier and their importance inshaping the car makers’ brands, a variety of business models emerge asa result. ‘Little OEMs’ handle everything from the development to theproduction of derivative products. System suppliers develop extensivefunctionality groups in the context of long-term partnerships, whileindependently managing second and third-tier suppliers. Spin-offsensure that value chain elements that are not critical to the character-istics of the brand remain competitive in the long run. Direct equityinvestments safeguard access to the skills and capacity needed forstrategically important components. Joint ventures develop new tech-nologies, and OEMs serve as incubators to foster innovation in collabo-ration with small, thinly financed firms. All of this points to a future inwhich business relationships will become more variegated and moreimportant than ever for car makers (Figure 5.22).


From hierarchies to genuine partnerships in tightly meshednetworksTraditional functional and hierarchic structures can no longer cope withthese many and varied challenges. Collaboration must now take on newforms that focus on customer requirements and brand values. Ultimately,this will lead to efficient partnerships that operate in tightly meshednetworks. Something akin to virtual companies will emerge thatcontribute specific modules and/or systems to sharpen the brand profile orraise competitiveness (Figure 5.23).

The opportunities afforded by such networks can only be realized ifnetwork management is institutionalized, however. Network managersneed to synchronize the various business models. All the parties involvedshould share the same understanding of customer requirements, brandcharacteristics and defined vehicle attributes. Legacy structures inheritedby OEMs and their network partners alike must systematically be trans-formed to accommodate the new forms of collaboration we havediscussed. Network partners must bring their organizations into line withtheir defined focus on vehicle attributes. Their workflows and proceduresmust be synchronized to create stable, reliable development processes thatrelease functionalities rather than just components. Network managersmust define a set of systematic criteria by which to select suitable partners


Inte-gration

partners

Coop-eration

partners

Systempartners

Partnersin other

industries

Smalltechnology

firms

Tier 1

Tier 2

Tier 3OEM

Figure 5.22 Networking all kinds of business relationshipsSource: Roland Berger

and permanently monitor the network configuration. Collaboration in anatmosphere of trust demands partnership agreements on issues such asintellectual capital and exclusivity arrangements, but also on matters suchas how potential conflicts between the partners are to be resolved. In thelong run, partners will only remain in the network if they possess strategiccore competencies or improve competitiveness.

SUMMARY

The technology challenge: does it constitute progress, or is it a pitfall? Theconditions and constraints surrounding technological development havechanged. Whereas innovation proceeded at a comparatively modest paceuntil the early 1990s, technological advances – especially in the field ofelectronics – have since triggered dramatic acceleration. This trend,coupled with the fact that new technologies now spread ever more quicklyto other brands and lower classes of car, is making it hard for car manufac-turers to differentiate themselves from their competitors. Even premiumbrands are becoming more interchangeable. The pressure to innovate, thecompetition that exists between alternative technologies and the crushingburden of R&D expenditure are threatening to catch premium manufac-turers in a cost and complexity trap.

The way to avoid this trap is to focus on those technologies that arecritical – that is, those technologies that distinguish a manufacturer fromits competitors, sharpen its brand profile and, no less important, bring inmore revenues. Premium car makers must abandon their ‘technology


OEM

PAST PRESENT

Functional hierarchy

OEM

Stronger project focus Network

OEM

Figure 5.23 From heirarchies to networksSource: Roland Berger

creates demand’ mantra in favour of a development rationale based on theunderstanding that ‘technology generates value’. They must know whattheir customers want and need, and quickly identify trends that will altercustomers’ system of values. At the same time, they must keep a watchfuleye on the importance and development of opinion leaders. Together withthe need for technology to match the brand profile, all of these factors willbe crucial to car makers’ future success.

Some manufacturers have already spotted the potential inherent in tech-nology strategies that focus on the customer. By achieving top grades in theEuro-NCAP crash tests, Renault, for instance, moved up to a leading positionin passive safety. Toyota’s current drive to establish hybrid technology as aninnovative core competence of the Lexus brand is another example.

Evidently, the process of rethinking is well under way. Many car makersare nevertheless still adopting a piecemeal approach: technological devel-opment is not focusing on the needs and wants of target customers across theboard. If they are to master the challenges that lie ahead, manufacturers willneed to apply a customer-oriented technology strategy that centres aroundthree core elements. First, the technology and product strategy must establishbenefits to the customer as the focal point of all technological development,defining those technologies that are to differentiate a brand and product fromrival brands and products. Second, a suitable operational design must fosterthis mentality and ensure that a customers’-eye view is implemented acrossall levels, divisions and vehicle projects. To this end, traditional developmentorganizations and processes must be transformed into functionality-orientedstructures. The third key element is network management. Role splittingbetween OEMs and suppliers along the value chain is creating a need for newforms of collaboration. All kinds of different business models will in thefuture coexist within tightly woven networks, and cooperation will takeplace in what amounts to a virtual company. Efficient network managementwill safeguard access to the knowledge and capacity held by key partners. Itwill ensure that customer-oriented technology strategies are implementeduniformly across all external partners in the network. It will also enablenetwork partners to closely integrate their activities, and will continuallyadapt the overall structure to current and future changes in the market.

Advances in technology are a decisive factor in giving premium vehicles adistinctive brand profile. This has been true in the past and it will be true alsoin the future. It is therefore imperative for car makers to focus strictly on therequirements of their target customers. Only then can they escape the costand complexity trap and successfully position their brands. The more accu-rately a manufacturer anticipates customer requirements and responds tothese in its product and technology offerings, the more leverage it will gain toexploit strategic opportunities.


146

6

The market challenge: whowill gain strategic control?Jürgen Reers, Partner, Roland Berger Strategy Consultants

CHALLENGES IN AUTOMOTIVE SALES

‘Premium segment now also hit by price-cutting war.’ ‘Car makers’ longstruggle with stagnant sales in core markets.’ ‘Margins nowhere nearadequate at many companies.’ These are the kind of depressing head-lines that are currently being seen in the media. For all market players –manufacturers, component suppliers and dealers – today’s automotiveindustry is becoming an ever more challenging arena. And for all ofthem, what is already hard-fought competition is set to become eventougher.

The industry’s key markets are stagnating. Growth can be achieved onlyby either broadening the product or service portfolio, or expanding intoemerging markets. At the same time, worldwide overcapacity and theambitious entries by newcomers from the Far East are making compe-tition fiercer than ever.

Changed behaviour? Change the way you think!

In this climate of flat demand and ruthless competition, customers’ expec-tations and behaviour too have changed significantly. For many buyers,cars have long since graduated from being just a way to get from A to Band are increasingly becoming an expression of a lifestyle. The traditionalforecast models that used to segment target groups by income, social

background and age alone are no longer sufficient to accurately predicthow people will behave. For instance a growing section of the affluentpopulation like to understate their prosperity. So buyers in this segmentopt for small, modern autos in place of the traditional high-end sedans andsaloon cars. In doing so, they are making a statement about their post-materialist lifestyle. To take another example, new value systems oftenbreed hybrid consumption patterns. The same buyer might head for theluxury segment when satisfying special requirements while consciouslylooking for rock-bottom price offerings in other categories.

Smart shopping appears unstoppable – and will heat up market compe-tition further still. In consumer goods, the trend is already well estab-lished. Customers have a detailed knowledge of where they can get thebest price for products and services. They also have a perceived need tosettle for nothing less. This combination has nourished the dominance ofdiscount formats in food and consumer electronics retail. Even stores thatsell luxury items are now having to accommodate this development. As aresult, 30 to 50 per cent markdowns are bringing luxury fashion wear intothe same price bracket as no-name products.

The same harsh wind is also blowing in the face of car dealers. In thepast, would-be buyers would stroll down to the nearest dealer to ask for anoffer for the brand of their choice. Today, an array of channels allows themto find out for themselves about the products and prices available from avariety of vendors. In Germany, 56 per cent of car buyers now use theinternet to gather information on possible configurations and prices, beforeweighing up and taking their decision (source: TNS Emnid/Autoscout 24).They then leverage information about incentives and discounts to haggleover prices with the dealer. The attractiveness of the brand and the productis still important, but decisions to buy autos is now increasingly beinglinked to price (see Figure 6.1).

In the automotive industry, intensified competition and price pressurehave driven a fast rate of innovation that has affected both product port-folios and core values.

Manufacturers’ response: a varied approach to productsand costs

On the product front, car manufacturers have responded by extending theirmodel ranges. Mercedes-Benz and BMW typify auto makers’ efforts tomove into new segments. The former’s A class and the latter’s 1 Serieshave given both companies a foothold in the less profitable compact class.Conversely, Volkswagen has added the Touareg and the Phaeton to the top

The market challenge 147

end of its traditional portfolio. The growing trend for vendors to set them-selves apart by developing innovative niche vehicles is constantlyspawning new subsegments. Twenty years or so ago, model segments wereclearly defined. Recent years have seen an explosion in niche segments,however. Cross-over models that combine elements of different segmentshave been introduced and have shaken up inherited product categories.Innovative roof models, for instance, have blended elements of the coupé,the convertible and the saloon car. Fresh models combine features of sportsutility vehicles (SUVs) and large saloon cars, adding the comfort of theluxury segment and using sleek roof lines to give a sports car-like flairreminiscent of a coupé. Current concept cars even cross coupés andconvertibles with SUVs.

Mercedes-Benz is an excellent case study illustrating the entire trendtoward the expansion of model ranges. Having produced just seven modelseries in 1980, the company was rolling out 20 by the end of 2005 (seeFigure 6.2).

While spreading the range of models on offer, manufacturers have alsoshortened vehicle lifecycles. Volkswagen’s first Golf had a rated lifecycleof nine years. With the Golf IV, that figure diminished to six years.

On the cost side, moves to optimize development, sourcing and productionprocesses have yielded substantial gains in efficiency. Extensive standardi-zation based on a common platform, and identical parts strategies, haveenabled firms to tap vast potential all along the value chain (see Figure 6.3).


36 3847

536264Certain brand/

certain model

Certainprice ceiling

Figure 6.1 Key criterion in decisions to buy autos in Germany, 2000–04(per cent)Source: Roland Berger Market Research survey conducted in Germany

Close collaboration between auto makers and their suppliers, with bothsides acting as partners, has delivered huge successes in this area. Theearly involvement of component suppliers in the product developmentprocess and the spread of networking thanks to open CAx data models can


E classE class T modelCLKS classCLSLG classC classCLK convertibleC class T modelSLKVianoA classM classC class sports coupéVaneoCLSSLRB classR class

7 8 8 9 14 20 No. of model seriesPassenger cars

1980 1985 1990 1995 2000 2005

1982–1993: 190

To 1997: E class coupé

1996–2003: V class

1991–1997: E class convertible

1981–1996: S class coupéTo 1981: SLC

Figure 6.2 Expansion of model series at Mercedes-Benz, 1980–2005Sources: Roland Berger Strategy Consultants, Global Insight, DaimlerChrysler website

Monetary effects

R&D • 5–20% of R&D costs forplatform/model-basedvehicle development

• 5–10% of material costs throughscale effects with identical parts

Purchasing

• 5–10% of per-vehicle productioncosts

Production

Figure 6.3 How standardized technology can boost efficiencySource: Roland Berger Strategy Consultants

save both time and money. Platform strategies and the outsourcing of thedevelopment and production of entire systems to first-tier suppliers enableeconomies of scale to be realized across corporate brands and even acrossmultiple manufacturers. In a similar strategy, heavily integratedproduction processes (where suppliers deliver parts just in time or just insequence) reduce complexity and speed up assembly on the line.

Competitive pressure remains severe

However, as all car makers focused their efforts on product and costaspects, cost advantages and unique selling propositions cancelled eachother out over time. In addition, the expansion of product ranges hasmade product development, manufacturing and marketing morecomplex in many cases. Consequently, the automotive market founditself in an even more difficult situation.

The volume segment, in particular, is likely to face similar problems.By 2010, this segment will see its share of the total market decline toaround 70 per cent, from nearly 80 per cent in 1980 (see Figure 6.4). Theconsumer goods market has already experienced this trend. In Germany,the volume segment has lost considerable market share to the premiumand discount segments over the past five years. A market share of 65 percent in 1999 has now shrunk to just 54 per cent (source: GfK).


1990 2002 2010

Premiumsegment

Volumesegment

Valuesegment 11

79

11

13

72

15

15

68

17

Figure 6.4 Trend in segments in Western Europe, 1990 versus 2010(percentage shares of new car sales)Source: Roland Berger Strategy Consultants

In the automotive industry, the battle for the growing premium segment isintensifying. For some considerable time, manufacturers have beenconceding sizeable discounts on premium models in order to gain ordefend market share. In the German market, for example, price reductionsof 10 per cent, 15 per cent and more are commonplace in this segment.

At the bottom end of the price range, low-cost offerings are facingeven more intense competition. One pioneer in focusing on cost effi-ciency and minimal features and fittings has been Renault/Nissan, thecompany that developed the Dacia Logan. Volkswagen’s announcementthat it intends to pursue a similar market strategy clearly shows thatother players cannot escape from this pressure. Volkswagen is looking tothe 3-K, whose production costs should come to about €3,000, toimprove its competitive position in emerging markets in particular.Further low-cost Asian vehicles will also penetrate the market. TheKoreans and Chinese are expanding aggressively. Indian makers alsoare working on vehicle strategies that would take production costs downbelow €2,000.

Harsher competition outside the new car market

New vehicles are not the only source of earnings that is coming underpressure in the automotive business. New market players, new deliverychannels and the deregulation of automotive sales are adding to compe-tition throughout the vehicle lifecycle.

Non-captive financial service providers and regular commercial banksare increasing the competition to finance auto purchases. Manufacturers’banks have already lost some ground, even in Germany where growthprospects for vehicle financing are decidedly positive, and where themarket share of loans and leasing-based financing is expected to rise from70 to 76 per cent by 2010. In 2004, 38 per cent of all new cars sold werefinanced by loans or leasing arrangements with the car makers’ banks,compared with 40 per cent two years earlier.

In vehicle insurance, the deregulation of contractual provisions andwider tariff spreads have led to a sharp drop in premiums. According toinformation from GDV, the German Insurance Association, the averagecar insurance premium stood at €475 in 1995. Adjusted for inflation, thisfigure had already slipped to €375 by 2003, a decline of 21 per cent.

In vehicle maintenance too, the elimination of quantitative selectionpursuant to the new Block Exemption Regulation has fuelled stiffer compe-tition. Moreover, professional sourcing logistics and service models aretransforming non-captive repair shops into ever more serious competitors.


As the technological complexity of vehicles increases, both authorizeddealers and non-captive repair shops are having to invest heavily in diag-nostics tools, technical support and ongoing employee training.

In the replacement parts business, non-captive wholesalers are gainingnew significance now that the Block Exemption Regulation has loosenedconditions surrounding the sale of original parts. Expectations that theDesign Protection Regulation will be eased throughout Europe are alsostrengthening the position of this channel. At the same time, the pan-European consolidation of parts wholesalers is only adding to the pressureto provide competitive services (in terms of the breadth of offerings,punctual and accurate delivery and professional logistics) while stilloffering attractive discount rates.

In the used car market, new information and delivery channels arecreating more transparency, which makes it more difficult for dealers torealize attractive prices. In addition, the internet makes it easier for privateindividuals to trade directly.

New providers with aggressive pricing policies are likewise fuellinggreater competition in other areas, such as car rental and other servicesegments.

Sales activities: an additional key to success

In light of all these challenges, it is increasingly important to pay moreattention to sales as well as to costs and product offerings. Here, there isroom for improvement on both the dealers’ and the manufacturers’ sides.Much of the existing sales system remains rigid and multi-tiered.Relationships between car makers and dealers have remained largelyunchanged for a long time. Accordingly, there is plenty of potential foroptimization.

Returns on investment in the car selling business are below the norm,trailing behind all other links in the automotive value chain. Whereas carmakers’ banks earned an average return on equity (ROE) of 16 per centfrom financial services in 2004, the car makers themselves posted an ROEof 12 per cent. Even large component suppliers managed an average of 10per cent, far more than the 4 per cent averaged by German dealers(sources: Autohaus, Bloomberg, Roland Berger’s own analysis).

The return on sales in the automobile trade has been in constant declinesince the 1970s. The average return on sales netted by authorized dealersin Germany is now down to about 1 per cent. Nearly 30 per cent of dealerspost losses (see Figure 6.5). Nevertheless, Roland Berger StrategyConsultants’ project experience shows that greater professionalism and


structural improvements can add at least one or two percentage points todealers’ operating profits (relative to sales).

Significant potential also remains to be tapped within manufacturers’ ownsales activities. Numerous projects performed by Roland Berger StrategyConsultants have improved per-vehicle earnings by €300 to €500. Thesegains can be achieved primarily by boosting administrative efficiency onthe wholesale level, and by providing better support to authorized dealersin order to optimize market penetration.

The sections that follow analyse key levers to tap these potentialimprovements in sales activities. To begin with, we shall examine theprincipal success factors in systematically identifying and addressingcustomers’ needs. The next step is to find ways to break down thebarriers inherent in the traditional sales system. Once we havediscussed the issue of who gains strategic control of the sales channel, thefinal section looks ahead to future trends and developments in sales.


<-2 -2 to -1

-1 to 0

0 to +1

1 to 2

2 to 3

>3

Percentage ofdealers [%]

Profits [earnings beforetax, in %]

7

11

18

37

17

8

2

40

30

20

10

0

Figure 6.5 Distribution of dealers’profits based on the example ofGermany, 2004 (percentage of dealers in each bracket)Source: Autohaus

UNDERSTANDING THE CUSTOMER: A KEYSUCCESS FACTOR

As customer behaviour changes and competition intensifies, under-standing customers and the structure of their needs becomes an ever morevital ingredient in business success.

In this context, companies must accurately define their target groups,the value propositions linked to their brands and the positioning of thosebrands. Only then can they consistently focus their product and serviceofferings to the specific needs of their target groups throughout the entiresales trajectory, right down to the point of sale.

The following key success factors can be identified:

� detailed knowledge of customers’ needs;� exact definition of the target group;� clear definition of the brand’s value proposition and positioning;� sharp focus on the value proposition of, and target group for, product

and service offerings;� consistent implementation at all stages in the selling process;� professional communication with customers throughout, down to the

point of sale in the car showroom.

Traditional forecasting models are out;value-based strategies are in

With all these success factors identified, one major challenge is to opera-tionalize customers’ needs and the brand’s value proposition. Since tradi-tional customer segmentation is breaking up and customer behaviour isbecoming more difficult to predict, a value-based strategy is nowrequired. Conventional models that forecast consumer behaviour solelyon the basis of social background and income no longer give accurateguidance.

That is why Roland Berger Strategy Consultants developed ‘RBProfiler’, a tool that models the structure of needs and values in a clear,understandable way. Using 19 key values, it is possible to segmentcustomers on the basis of their preferences and aversions, but also basedon their perception of brand positioning (see Figure 6.6).

The Mini is a good example of the benefits of this kind of value-basedstrategy. A clear notion of the specific target group to which this car would


appeal was critical to its market success. Accordingly, both brand andproduct had to be positioned very precisely.

Based on such a clear-cut definition, manufacturers can collaborate withdealers to set the direction of their product and service strategy. Thisapproach ensures that customers’ needs are addressed consistently at alllevels including to the point of sale, a strategy designed to attract andretain potential buyers (see Figure 6.7).

For premium manufacturers, for example, it is important to create anexclusive setting that lines up perfectly with the brand values the companywishes to communicate. This includes elegant rooms in which customerscan talk privately with well-trained staff. It involves high-class presenta-tions of seat covers and wood panelling, evocative of a quality tailorcutting a suit to measure. It means presenting maintenance work in anatmosphere reminiscent of hand-made production, caring for vehicles inspecially designed car wash systems, and so on. Similarly, car dealers thatsell low-cost (‘value’) automobiles can powerfully underscore theirprofile as price leaders precisely by crafting a rigorously purist ambiancethat eliminates gimmicks and peripheral elements. Another crucial aspectis that the behaviour and communication of the entire sales and serviceteam must fully match the image presented at the point of sale.


E+

R+

E-

R-

E

R

Smart Shopping

Total Cost

Nature

Fair

PurismTranquil

Thrill&Fun

New&Cool

Carefree

Vitality

Calming

Passion

Classic

Customized

Personal Efficiency

24/7 Protech

Service

Quality

Proven

emotional

Rational

More consumptionLess consumption

Customer segmentation/brand positioning basedon value clusters

‘Less is more’ ‘The more the better’

Products need to addressemotional aspects

Products need to complywith rational criteria

Figure 6.6 Key values in the RB Profiler modelSource: Roland Berger Strategy Consultants

End-to-end CRM systems: an important success factor

Another important tool to help translate an understanding of customerneeds into new business or more loyal customers is a powerful customerrelationship management (CRM) system. Careful customer targeting thatconsistently ‘fulfills customer needs’ can open up vast reserves of acqui-sition and cross-selling potential throughout the customer and vehicle life-cycle. Especially in the automotive industry, customer loyalty is rated asone of the most vital success factors.

From the vendor’s point of view, the main functions of CRM programmesare to facilitate long-term customer loyalty across multi-year purchasecycles, and to reinforce the brand image.

Customer loyalty programmes are becoming increasingly widespreadin the automotive industry. Bonus programmes, customer cards andcustomer clubs are frequently used as elements of CRM strategies.Compared with other sectors such as airlines, hotels, service stations anddepartment stores, however, the use of these programmes is still at a rela-tively early stage.

Alongside these programmes, car makers have already investedsubstantial amounts of money in CRM systems and customer carecentres, yet the results have so far failed to live up to expectations. Onemain reason for this failure is that neither information nor processesflow seamlessly between manufacturers and dealers. The rigid struc-


Name, symbolMarketing mixBrand users

ExpectationsPreferencesBehaviour

Perception of value propositions by theconsumer

2 Projection – brand positioning1

Purchase decision4

Brandpositioning

Personal value system

Assessment of whethervalue propositions areconsistent with personalvalues up to the point of sale

3

Figure 6.7 Value assessment and consistent brand positioningSource: Roland Berger Strategy Consultants

tures of today’s sales systems still prevent market players from trulyunderstanding their customers, identifying them systematically,winning their custom and retaining it in the long term. These limitationsmust be recognized and overcome.

OVERCOMING THE LIMITATIONS OF TODAY’S SALES SYSTEMS

Existing sales systems still contain glaring structural deficits and effec-tively prevent manufacturers and dealers from tapping the full marketpotential. The core problem is the rigid, multi-tiered sales structure thatinvolves manufacturers, wholesalers, dealers and in some casessubsidiary dealers or service companies. This structure makes it difficultfor delivery, service and information processes to flow smoothly from endto end. Improvements can be made on all three levels: the manufacturers’level, the wholesale level and the dealers’ level.

Potential for improvement on all levels of the existingsales system

Many auto makers still focus too narrowly on production and model port-folios. Rather than rigorously aligning everything they do with customerneeds and current demand, they run expensive special offer campaigns toencourage the market to soak up overcapacity. Offers launched in thecontext of employee discount campaigns on the US market in the summerof 2005 provide a graphic illustration. In early summer 2005, GM rolledout an extremely aggressive programme in the United States, offeringevery potential car buyer the chance to buy a broad selection of the modelrange at GM-internal rates. Rivals were forced to respond in kind. WhenGM’s sales leapt 47 per cent in June, Ford and Chrysler followed suit inearly July and also made their internal-rate discounts available to allcustomers. These two vendors also saw their July sales surge by 25 percent. It is, however, extremely questionable whether people were actuallybuying more rather than just buying earlier. Promotions of this kind oftenadversely impact brand image. Perhaps worse still, customers’ higherexpectations with regard to realizable discounts can erode the profitabilityof current and future models for a long time to come.


Although many auto makers have integrated the wholesale level in thelarger markets, the traditional principle of ‘one country, one company’remains generally valid. Hub models, in which geographically and socio-culturally related countries merge to form a single organization, are stillfew and far between in the car industry. Many smaller markets are stillserved by importers, who tend to use either the same elaborate processesand systems as are operated in larger markets, or very rudimentary solu-tions. Cost disadvantages result, and managing these systems is difficultbecause of substandard support functions. Cross-border synergies andopportunities to run a more professional operation are often squandered.

Like the manufacturers’ level and the wholesale level, the dealers’ leveltoo still exhibits structural deficits. Especially in Europe, countless effortsto restructure networks have left the market as fragmented as ever, as isshown by a comparison with the United States (see Figure 6.8). Failure toreach critical mass thus prevents companies from pursuing professionalmarketing strategies and reaping economies of scale.


No. of dealersper 1,000 km2

13 .7

2 .3

No. of dealers per100,000 inhabitants

11 .7

7 .5

WesternEurope

USA

New car salesper dealer

371

760

Figure 6.8 Structure of dealer networks in Western Europe and theUnited States, 2003Sources: Roland Berger Strategy Consultants; HWB; Automotive News, Ipeadata; IBGE;Fenabrave

Unsatisfactory earnings often inhibit necessary investments both inpoint-of-sale presentations that do justice to the brand and in technicalinfrastructure. Many dealers thus find themselves trapped in a viciouscircle. All manufacturers’ margin systems naturally include fixed marginsand volume bonuses, but they also include significant spreads forcompliance with defined quantitative and qualitative standards. Standardsto ensure that a company supports the brand image are one example. Othercriteria include the availability of demonstrators, specifications for salesworkplaces, participation in dealer benchmarking exercises, the size andnature of showroom space, and attendance on mandatory training courses.Depending on the particular car maker, authorized dealers can increasetheir margins by up to seven percentage points by meeting these stan-dards. However, if meagre earnings prevent them from investing what canbe substantial sums of money, they forfeit a significant share of theirmargin. Earnings deteriorate further, leaving even less room forinvestment. This negative feedback system leads to further inadequacies.

The bottom line is that the sales systems often in place today need tobecome much more effective and much more efficient – despite the factthat car makers and dealers alike have already done a lot to overcome thelimitations of these systems.

Limited success for optimization programmes to date

Manufacturers have indeed pumped huge sums into sales and dealer-ships. First and foremost, they have set up their own outlets to reinforcebrand identity. They have restructured sales networks to improve dealerquality, and they have integrated wholesale activities in order to improvemarket access.

Auto makers invest hundreds of millions in their own outlets and brandexperiences to give a lift to the presence of their brand in metropolitanareas. According to press reports, BMW, for instance, is spending some€100 million on BMW World, the new delivery centre at its headquartersin Munich. Meanwhile, DaimlerChrysler is spending €250 million on newpremises in Stuttgart which feature an adjacent automobile museum.

Practically all car companies have been restructuring their salesnetworks for years. In 2000, 53,000 main dealers ran a total of 106,000sales outlets in Western Europe. By 2004, the numbers had shrunk to43,000 dealers (a decline of almost 20 per cent) and 74,000 outlets (adecline of 30 per cent; source: HWB). Such adjustments cost manufac-turers a great deal of money, most of which goes on taking back vehiclesand parts, and especially in Germany, on compensating now-redundant


dealers (pursuant to Section 89b of the German Civil Code (HGB)). Inaddition, where network adjustment involves recruiting new, more profes-sional dealers, the car makers also have to pay investment support andincrease their marketing budgets to launch the new dealerships. A RolandBerger project illustrates just how much investment is needed: in oneEuropean market, a car maker spent over €150 million to cut 20 per centof its 600 sites, while enrolling new dealers to enable the leaner network toincrease its market share.

In the wake of the Block Exemption Regulation, manufacturers havealso invested in integrating independent importers to maximize theiraccess to core European markets. These firms have spent considerablesums to buy outright or acquire a majority interest in previously inde-pendent importers.

These realignment programmes call for substantial resources, but stillusually happen within the boundaries of traditional sales systems.Genuine innovations – strategies that break the rules, that optimize salesfrom top to bottom by reshuffling roles and improving the integration ofdealers, wholesalers/importers and auto makers – have so far been thevery rare exception. Brand values are not communicated and transformedconsistently all along the line to the point of sale. In many cases, productsand services simply do not harmonize. Nor is it unusual for poorly coordi-nated strategies to cultivate contradictory perceptions among customers.Actions taken by different sales partners do not complement each other,but actually tend to cancel each other out – or even have a negative impact.

If companies spend huge sums on spectacular showrooms but thenpopulate these with ill-qualified sales and service staff at the point ofsale, customers perceive this dissonance and begin to see whereprocesses are not really working. A brand claim loses its credibility themoment the salesperson fails to embody the brand values or inadequatelyexplains the products and services. The same thing happens whenCustomer Service misses a fault because it uses obsolete diagnosticsystems, or when repair shop customers have to wait for replacementparts that are out of stock.

Ultimately, even the redeployment of resources in sales has not yieldedthe improvements that are still possible. Inefficient processes and struc-tures hinder smooth collaboration between partners at different points inthe sales trajectory. Yet considerably more potential could be tapped if thesales system was remodelled from the ground up. The question is, howshould the various market players go about driving the change process?There are inevitably conflicts of interest between auto companies, whole-salers/importers and dealers. The crucial issue will therefore be who gainsstrategic control as the ‘sales power play’ unfolds.


POWER PLAY IN SALES: WHO WILL GAINCONTROL?

Manufacturers have traditionally exercised significant control over salesin the automotive industry. Although the majority of sales partner organi-zations were independent, the Block Exemption Regulation laid the foun-dations for this control for a protracted period. For a long time, the largenumber of small partners in the market prevented dealers from becominga strong counterweight, and thus from taking control of the deliverychannel. Now, however, deregulation and increasing concentration amongdealers is rewriting the rules.

Sales operations must therefore ask themselves a number of key ques-tions about the future:

� Can dealers gain control of the delivery channel?� What steps will car makers take to defend or even improve their

position?� Will new players gain a foothold in automotive sales in future?

Dealer power

The process of concentration among dealerships raises the questionwhether car dealers are poised to gain more power and follow a similarpath to the one already travelled by, for example, the consumer goodsindustry. Concentration in the German food retail industry, for example,has been extreme in recent decades. The five largest food chains haveincreased their share of total sales nearly threefold, to almost 70 per cent,over the past 25 years. By comparison, concentration in the automotiveretail industry is very much weaker, in all European markets. While theUK’s top five car dealer groups can at least boast a 14 per cent marketshare, the corresponding figure is 6 per cent in France and 4 per cent inSpain. In Germany, the five largest dealer chains account for a mere 3 percent of the total new vehicle market.

Concentration will nevertheless continue in this industry. Indeed, it islikely to accelerate to enable companies to realize economies of scale. Atpresent, the car-selling industry is consolidating in two directions:towards internationalization and towards multi-brand sales.

Large dealer groups are enlarging their footprint by acquiringcompanies at home and abroad. Some, like the Weller Group in Germany,


are focusing on national and regional purchases. Pan-European and evenglobal acquisitions are becoming increasingly widespread, however.

Pendragon, a retail group of British origin, has bought on a massivescale in its home market, and has also been acquiring dealerships inGermany and the United States since 1990. By the end of 2004, thecompany had acquired 12 US and 10 German operations on top of its 244UK-based dealers.

Porsche’s Austrian holding company has been pursuing a similar inter-nationalization strategy, and today operates in 15 European countries.When Eastern Europe opened up, the Porsche holding company became awholesaler (importer) in Hungary, Slovakia, Slovenia, Croatia, Romania,Serbia-Montenegro, Bulgaria, and more recently in Albania andMacedonia. In these countries, as in the Czech Republic, Germany andItaly, the Porsche holding company also runs sales outlets exclusively forbrands belonging to the VW Group. Its involvement in Western Europedates back to wholesale activities with niche brands that began in Francein the mid-1970s. The move into retail sales came when an equity stake inFrance’s PGA was acquired in 1999. This was followed by acquisition ofan interest in the Nefkens Group in 2001 and the purchase of CICA, aFrench company, a year later. One PGA subsidiary also runs an operationin Poland. The story does not end there, however. In mid-2005, thecompany also entered the Chinese market, where it is now selling vehiclesin a pilot project.

This kind of strategy can yield scale advantages in all parts of thebusiness. In the new vehicle segment, higher sales strengthen thecompany’s demand position in relation to auto makers. Bundling inven-tories and centralizing vehicle preparation harbour huge potential for newcars and demonstrators, and even more so for used cars. These practicesalso make it possible to standardize the valuation and pricing of used cars.After-sales operations can leverage higher volume target agreements andrealize substantial potential by centralizing capacity for coachwork andpaintwork repairs, as well as for parts logistics. Indirect savings can alsobe achieved by bundling corporate functions such as management,accounting and human resources.

Alongside regional expansion, a discernible trend toward multi-brandsales is being driven by customers and dealers alike. A study by RolandBerger Market Research found that 69 per cent of auto buyers prefer to beable to compare different brands under one roof. Dealers are equallyenthusiastic about multi-brand sales: 47 per cent of single-brand dealersintend to add at least one more brand to their portfolio. A further 24 percent are still undecided, but are considering a similar course of action.


Multi-brand strategies can enable dealers to exploit a wide range ofsynergies. In the new car business, broader market coverage and a morebalanced spread of end-customer risk are the key market-side advantages.The option of offering and managing mixed fleets is a further source ofpotential in relation to small and mid-sized corporate customers. Bundlingused car business across a number of brands likewise lets dealers offer awider choice and opens substantial potential to improve inventorymanagement. Earnings can be further optimized by bundling demand foridentical parts across brands, and by making better use of repair shopcapacity. Finally, overheads can be lowered by organizing management,accounting and other administrative tasks across brands too.

Larger multi-brand groups are generally able to translate economies ofscale into higher earnings, as can be seen from comparisons of large,publicly traded mega-retailers with the average of retailers in the UK.

Multi-brand groups do not restrict their business models solely to tradi-tional retail sales, however. The example of the Dutch-based KroymansGroup is indicative of their innovative expansion strategies. This auto dealergroup now has a presence in 27 European countries, in which it sells 17brands. Kroymans’ focus is on GM and Ford. Its total new car sales volumecame to 60,000 units in 2005. Besides expanding its array of retail outlets, thecompany is also making inroads into the financial services sector. It has set upits own leasing companies in Belgium, the Netherlands and Luxembourg, andis currently launching internet-based leasing service providers in Germany.

Furthermore, the Dutch group is now the sole European wholesaledistributor for GM’s Cadillac, Corvette and Hummer brands. In return, GMis injecting some US $25 million into Kroymans to help fund its plannedgrowth. This is the first time that an auto maker has outsourced its entireEuropean sales operation for a given brand – and the result is a classicwin–win situation. Kroymans now has the chance to expand further and addto its market muscle. For its part, GM now has a powerful partner with aprofessional market image, but can also reduce its management costs andcontain its financial risks. Not content to commit only to GM, Kroymans isalso collaborating with Alfa Romeo, and secured the distribution rights forthis brand too in the Netherlands in mid-2005.

As we have seen, the process of concentration will continue in the carselling business in the years ahead. Even taking a medium-term horizon of5 to 10 years, however, car dealers will not attain the strength that theirpeers in the consumer goods industry have achieved. There are severalreasons for this. The investment bill will be very high indeed. Multi-brandsales runs the risk of diverting rather than growing business. In addition,the product, service and process levels will all become more complex. For


concentration to progress to the stage we have seen in consumer goodsretail, each of the five largest German dealer groups would, for example,have to increase its new car sales from 20,000 or so today to an annualaverage of 400,000. Growth by a factor of 20 does not appear realistic.

The auto makers strike back

The car makers are also doing their utmost to consolidate their strategiccompetitive position in sales. Almost all manufacturers have alreadytaken steps to launch their own outlets. Premium providers in particular,but also French volume producers have applied themselves to making thisstrategy work. Their primary objectives are to gain more control over endcustomers at the point of sale and to improve the way they present theirbrands. Especially in the larger cities, exorbitant land and rental chargesoften prevent non-captive dealers from running a profitable business.

However, not all manufacturers will successfully build up the corecompetencies they would need in the retail discipline. High start-up costsand heavy capital tie-up will probably cause the number of car makers’own outlets to stagnate or dwindle (see Figure 6.9).

Auto companies are trying to use CRM activities (building call centres,for example, and establishing customer clubs and cards) to strengthentheir direct contact with end customers. They are pursuing exactly the


1,620

1,3601,280

2002 2003 2004 2010

1,500–1,700

Figure 6.9 Trend in the number of car makers’own outlets, 2002–10 inWestern Europe (number of sites)Sources: Roland Berger Strategy Consultants, HWB

same goal in expanding their range of financial services to include creditcards, savings deposits, investment funds, savings plans for new vehicles,and even non-vehicle insurance. Volkswagen is going so far that it wantsto become its customers’ main bank. In keeping with this objective, it ismarketing the entire spectrum of banking products, from current accountsto mortgages. BMW also recently announced its intention to systemati-cally expand its portfolio of financial services.

At the same time, seizing the opportunity afforded in Europe by the newBlock Exemption Regulation, car makers are seeking to gain greatercontrol over sales by setting high standards for dealers.

New players in the market

In the past, new players have repeatedly emerged in the car salesbusiness. The pioneers have mostly been consumer goods retail chainssuch as EDEKA, KarstadtQuelle and Tchibo in Germany, and Tesco inthe UK. However, no dealers from outside the car industry have yet madea lasting success of such ventures. The examples we have seen suggestthat customers are not enamoured by such providers and sales formats.Most of these players are unable to foster sufficient trust in their after-sales support capabilities in the event of warranty claims, or of goodwillclaims when warranty expires. This is because most of these formatsrevolve around brokering models or pure sales promotions. Limited salessuccess and the one-off nature of the campaigns held by EDEKA andTchibo, for example, paint a clear picture. Mastering the vast complex-ities of this business – ensuring that car sales, maintenance, replacementparts services, other services, and the return and marketing of used carswork smoothly together – demands a huge investment. Accordingly,players from outside the industry tend to shy away. Low margins,sizeable investments, heavy capital tie-up and the cyclical nature of theautomotive business should be enough to keep new rivals from the doorin future.

To summarize, we can expect that both dealers and auto makers willstep up their efforts to tap new veins of value potential in the salesprocess. New competitors from outside the industry will remain aperipheral phenomenon.


Partnership promises greater success than runningbattles to control sales

When pondering whether dealers or manufacturers will come out of thispower play on top, it is worth thinking back to the key success factors withwhich we started out. Understanding what customers need and translatingbrand values into unmistakable products and services are fundamental corecompetencies for car makers, but they are equally vital to successful sales.Applying such product and service competence consistently throughoutthe sales chain demands an uncompromising commitment to customer,sales and service orientation – all of which are the traditional strengths ofdealers. If the complementary competencies of dealers and auto makerscan be interlocked smoothly, considerable value can be added as a result.This development is likely to be accelerated if car makers concentrate ontheir core competencies while dealers expand and become increasinglyprofessional at what they do. In other words, there are compelling argu-ments to abandon the rivalry model and instead build the relationshipbetween manufacturers and dealers on partnership and collaboration.

Toyota’s activities on the German market illustrate this approach. InGermany, Toyota has a two-tiered sales network in which 140 maindealers operate 290 out of a total of 630 sales centres nationwide. Thenetwork also includes 70 dedicated service centres (figures valid at year-end 2005). The car company focuses on large, professional dealershipswith which it works together as a partner. In 2004, for example, Toyotainvested in a large-scale dealer coaching programme involving externalsupport. Conducted for the 120 biggest dealers, this project applied aspecially developed action list with the aim of improving dealers’performance.

The principle of having only one dealer in one city lines up with thestrategy of minimizing intrabrand competition. In large metropolitanareas, Toyota’s stated aim is to increase collaboration with large dealersand dealer groups.

Going a step further, Toyota also worked with the dealers’association todraw up a fair play charter in order to involve its B dealers to a greaterextent. The charter makes recommendations on collaboration between Aand B dealers. It covers such themes as passing on discounts, splitting thecost of marketing activities and agreeing volume targets. Both parties’behaviour is monitored in an ongoing evaluation process.

These and other elements are helping Toyota to translate its strategyinto visible market success. In recent years, the company has continuallyenlarged its market share, which grew from 2.4 per cent in 1996 to 3.9 percent in 2004. Since JD Power first published its CSI study in 2002, the


Japanese brand has consistently topped the customer satisfaction table. In2005, Toyota models won the top slot in five of seven segments. Amongdealers too, Toyota is the most popular brand in the large imported brandscategory and ranks fourth among all manufacturers (source:MarkenMonitor study, 2005).

Looking ahead to what the future holds for automotive sales, the keyquestion is, what concrete implications can and must be drawn from theneed for a stronger focus on partnership?

THE FUTURE FOR AUTO SALES: FROMSEPARATE TIERS TO INTEGRATED NETWORK

Critical examination of the sales system as it stands leads us to thefollowing conclusion: rigid, multi-tiered structures and the chargedatmosphere of conflict between car makers and dealers are two of themain causes of inefficiencies. Examples such as Toyota’s professionalcollaboration with its dealers and the partnership that exists betweenKroymans and GM lend considerable credibility to the claim that part-nership can make both sides more effective and more efficient.

To return to our point of departure, it is useful to enquire whether, and towhat extent, the insights gained from revectored manufacturer–supplier rela-tionships can also be transposed onto sales dealerships. Interestingly, thereare a number of obvious parallels between the manufacturer–componentsupplier interface and the manufacturer–dealer interface.

At both of these value chain interfaces, the large number of externalpartners is one important driver of complexity. Today, the average automaker has something like 650 direct suppliers – down by almost half from1,200 in the early 1990s. In the same period, manufacturers have likewisealmost halved the number of interfaces to individual dealers. The absolutefigure, however, is still significantly higher. In 2004, every brand still hadan average of 1,300 main dealers throughout Europe. For the leadingbrands, this figure rises to just under 2,000 (source: HWB).

Heavy demands are placed on logistical processes at both interfaces. Atthe interface to component suppliers, the complete value chain has to becoordinated, from raw materials supplier through first-tier supplier toproduction by the manufacturer. Innovation, quality and cost targets anddeadlines likewise have to be reconciled. At the interface to dealers, themain challenge derives from the multiplicity of new car, used car andparts/accessories processes. Owing to the large number of parts, storage,


transportation and order processing in relation to vehicles and replacementparts are just as error-prone as the production process itself. Deficiencies inthe logistical chain can thus have a devastating impact at either interface.One missing part can bring production of an entire vehicle to a standstill.Similarly, one replacement part that is out of stock can leave a defective carstanding in the repair shop for an unacceptable period.

Innovation and technological advances present major challenges onboth sides. Electronics is not only revolutionizing the component supplyindustry, its impact is also being experienced in after-sales service. In-vehicle electronic content is increasing all the time. According to a studyby Roland Berger, electronic content accounted for 12 per cent of thevalue of a vehicle in 1995 and will rise to 32 per cent by 2015. This meansthat both manufacturers and suppliers must develop and expand theirsoftware expertise in this field. Their development processes mustdovetail more exactly, and standardization must be advanced in order toovercome quality problems in the electronics sector. In after-sales, dealersmust invest substantial amounts in modern diagnostic systems and in theexpertise of their service staff, if electronic defects are to be remediedquickly and reliably. This investment is balanced out by additional salespotential, however, as standardized system architectures allow the latestelectronic innovations to be installed in plug-and-play mode by dealersthemselves during the vehicle lifecycle.

Both suppliers and dealers have an important part to play in communi-cating and fostering customers’ perception of brand values. Supplierscontribute modules whose attributes are instrumental in shaping brandperception. They must therefore develop an in-depth understanding ofhow to translate abstract brand values into concrete products. Dealers arecrucial to the way products and services are perceived at the point of sale.They thus play a pivotal role in ensuring that brand values are communi-cated consistently across all channels.

Applying lessons learnt in collaboration with suppliersto collaboration with dealers

It therefore makes sense to look at how manufacturers’ relationships withthe supply industry have been improved and successfully realigned, and toconsider how the same might be done in relation to dealers. Larger, moreprofessional dealerships could in future increasingly assume the role ofsystems integrators on behalf of manufacturers. Such first-tier dealerswould shoulder development and management tasks for an entire


economic area, and integrate smaller downstream sales and servicecentres (tiers 2 and 3).

A wide range of functions could be entrusted to dealers in this way.Physical distribution (parts shipments, vehicle stocks), aspects of dealersupport (training, business management advice), a variety of control func-tions (enforcement/monitoring of standards) and the coordination ofregional marketing efforts are all possible candidates. Such arrangementswould ease the burden on car makers by reducing the number of interfacesto direct partners. Quality could be improved by collaborating moreclosely with system partners. This structure should also yield tangible costbenefits. Since systems integrators in the dealer network could handlevarious functions from a position of closer proximity to the market, automakers could reduce their own capital tie-up. This would allow them toconcentrate on developing innovative sales and service strategies,improving the communication of brand values at the point of sale, andraising the quality of sales and service. To optimize the management andcare of larger and increasingly international dealerships, the sales organi-zation too should be reviewed. An international key account organizationto serve dealer groups could effectively complement – or even replace –the heavily decentralized field service organizations that exist today.

From static multi-tiered model to dynamic network

Closer collaboration with a smaller number of better-quality partners isone way forward. Another is to dissolve rigid sales tiers and transformthem into more flexible networks. In strategic sales regions, this wouldpermit dealers to assume a more prominent role, while systems integratorscould play a greater part in providing comprehensive geographiccoverage.

At the wholesale level, the one-dimensional tradition of having onesales company per country can be overcome by centralizing functions ordistributing them across regional hubs. Only those functions thatgenuinely constitute local unique selling points (USPs) would have to bebased on site in the relevant countries or regions. Many industries alreadythink along these lines. Leading players in the consumer goods industryhave revectored their European wholesale stratum into multi-countryhubs scattered across three to seven regions. These hubs mostly centralizeadministrative tasks such as finance, control and IT, alongside keyaccount management, marketing strategy, business development, salessupport and logistics. By contrast, decentralized organizations are set upfor front-line activities such as sales operations and operational marketing


activities. Sufficient proximity to the market and superior process qualityare the key drivers for such models, which must also optimize cost effi-ciency. Introducing this kind of hub model can cut overhead costs by up to40 per cent.

The model is not yet widely represented in the automotive industry, yetthe first tentative beginnings are already discernible. One leading Germancar maker began building a hub in northern Europe in 2004 and soon plansto apply the same model to an Eastern European region. A Japanese OEMimplemented the model as far back as 1999 and now has three regionalhub organizations that run its European wholesale operations. A numberof crucial criteria must be borne in mind when forming such clusters orhubs. Homogeneous customer preferences, regional proximity, culturaland/or language barriers, the level of local economic development, marketsize and competitive position must all be taken into account. Intelligentlydesigned hub strategies will have similar effects to those in other indus-tries. Process quality will improve on the wholesale level. Internalknowledge will grow as expertise is bundled across multiple countries.Wholesale costs will be cut, and dealers will enjoy a better quality ofsupport.

Outlook

So who will gain control in this new constellation of partnerships andnetworks? When competitive conflict gives way to constructive collabo-ration, control is no longer the focal issue. The result is a win–win situ-ation. Like the process that the component supply industry has alreadyexperienced, it will take at least a decade before new business models takeshape that adequately accommodate new requirements and share outbenefits and burdens in an equitable manner. As the spider at the centre ofthe web, manufacturers have the chance to actively guide processes on thesales side too. However, if they fail to take action in the areas we havediscussed, powerful dealer groups will take matters into their own handsand rewrite the rules of the game. In sales, as in other disciplines, size andmarket power merely create potential. Lasting success demands entrepre-neurial creativity and fast execution, by either the car maker or the dealer.


7

The sales and after-saleschallenge: capturing value

along the car lifecycleMax Blanchet, Partner, and Jacques Rade, Principal,

Roland Berger Strategy Consultants

In the automotive industry, the car is not the only automotive activitythat generates revenues. Various activities related to the vehicle along itslifecycle, such as vehicle financing, maintenance and repair, used carbuy-back and reselling activities, wholesale spare parts, as well asservices, provide quite substantial revenues.

These activities do in fact generate higher profits than manufacturingvehicles. It is no secret that vehicle manufacturers, or originalequipment manufacturers (OEMs), make almost 50 per cent of theirprofits from the spare parts business. A study, which could perhapssound too simplistic, estimated the price of a car built from spare partsat roughly four times its new price. These additional sources of profitare of utmost importance for OEMs because they are linked to the poolof cars in use and not to new car sales, which are always subject tocycles or dependent on the success of new models. The cars in useprovide greater financial stability, which is especially appreciated bythe financial community and rating agencies. In a similar fashion,financial services are also highly profitable, driven more and more bythe used car business and less by the sale of new cars.

171

THE AUTOMOTIVE VALUE CHAIN DURING THE CAR LIFECYCLE

The average return on capital (ROCE) employed in automotive-relatedactivities throughout the lifecycle of a vehicle is 6 per cent, which is ratherlow compared with other industries manufacturing similar high-techproducts. This is especially true when we consider that activities notrelated to new car sales contribute more strongly to the ROCE.

Profitability is somewhat unbalanced across activities and amongplayers (Figure 7.1). The ROCE is high in all financing activities, inservice and repair, and has been growing more recently in the used carbusiness. These activities contribute strongly to the profitability of theoverall market, and help compensate for the considerable capitalrequired for developing new car models. Parts suppliers of productswith high replacement volumes such as makers of wipers, tyres, filtersand radiators benefit from this situation. This is not always true oforiginal equipment suppliers (OES) that manufacture seats, roofs ordashboards, for instance.

In our analysis, the closer the activity is to the end-user, the higher theprofitability. As a general trend, players that want to capture more value in


Maintenance/spare parts

Operation

Insurance/financing

Used cars

New cars

Others Banks/insurers

Distri-bution1)

OEM2) Suppliers

28

1

13

-5

+/-0

6 per cent ROCEin total

1) Including importers/distributors 2) Including subsidiaries

3 6 83 16

304140

10

16 12

2

1

5

1

- 6

- 4

- 5

Figure 7.1 Return on capital employed per vehicle in Europe (per cent)Source: Roland Berger Strategy Consultants

the market are pursuing strategies aiming at involves moving closer to thefinal customers and strengthening ties with them.

For decades, this business model has operated in the European auto-motive market. As a result, the playing field has progressively reached asort of equilibrium, with entrenched beliefs such as:

� ‘Original parts are found in the OES channel, non-original parts in theindependent aftermarket (IAM) channel.’

� ‘Parts prices are set up by OEMs and are the indisputable reference inthe market.’

� ‘Recent vehicles are repaired in the OES channel, old vehicles in theIAM channel.’

� ‘Used cars are cars with more than 30,000 kilometres on the clock.’� ‘Dealers are 100 per cent dependent on OEMs.’

When compared with other consumer goods sectors such as luxury goodsand food, it becomes apparent how unique this situation is to the auto-motive market. Automotive sales and after-sales activities have historicallybeen organized and managed using an ‘offer-push’ approach rather than‘customer-pull’, because the customer’s primary need is not driven by anemotional demand but rather by a necessity, namely to repair, maintain orget rid of a used car. In addition, the automotive product is unquestionablythe most complex object sold in a mass production system.

A MARKET IN FLUX: MULTIPLE FACTORSACCELERATE CHANGE

Profound changes have altered the contours of the market over the past fiveto eight years. In this changing environment, new rules have been intro-duced. While the new block exemption regulation (BER) has grabbedeveryone’s attention, partly because of the media spotlight on it, the actualimpact of the BER has been rather limited. It is only one factor in a long listof issues changing the rules of the game. Other important factors include:

� Product technology and diversity: the increase in advanced tech-nology, for example electronics, electromechanical systems andsystems integration, together with the large diversity of models andbrands, creates far greater complexity when it comes to managingafter-sales activities.

The sales and after-sales challenge 173

� Car market evolution: the growing and ageing pool of cars that hasemerged because of longer car lifecycles, third family cars and highadoption rates is changing the picture. For instance, the number of carsover 10 years old in Germany is growing at 3 per cent annually, and thenumber of seven to nine-year-old cars is growing at an annual 4 percent in France and 10 per cent in Spain.

� Evolution of customer needs: customers’ expectations regardingservice quality, reliability and relationships are growing, largelyencouraged by the experiences customers have gained with otherservices (banks, consumer goods and so on).

� Changes in consumer behaviour: the increase in professional vehicles(for example company cars and long-term rental), combined with themuch wider and professional used car offer, is changing consumerbehaviour.

� Regulatory changes: the BER is altering the automotive landscapeespecially for spare parts, but so too is Eurodesign, which threatensdesign-proprietary parts.

� ‘Specialized prescriber groups’: the growing influence of insurancecompanies and associations such as Thatcham, and rating instituteslike Euro NCAP and JD Power, also affects the market.

� Europeanization: the creation of the EU-25 raises questions about howto address the additional countries with the leanest distribution costs,how to avoid grey markets, and so on.

� Channel consolidation: large dealer groups (especially in the UK andFrance) are garnering a huge market share; consolidated IAM whole-salers, large affiliated and networked repairers and large fleetmanagement companies now command clout.

� New entrants: retail store chains have been viewed as potential newentrants, but entry barriers are too high. The real new entrants arebanks and financial institutions, leasing and fleet managementcompanies. These players are keen to acquire a share of this attractivemarket.

In this chapter, the OES channel stands for the brand distribution channelsof OEMs. This includes for instance OEMs’ affiliates, dealers and agents.The IAM channel stands for the independent after-market, which includeswholesalers, fast-fitters, repairers and body-shop networks.


THREATS AND OPPORTUNITIES INCREASE FOR MARKET PLAYERS

In this changing environment, all automotive players face risks relating totheir current business model, but opportunities also abound. The risksfaced by OEMs include losing a sizeable chunk of their spare partsbusiness to distribution partners, and having financial services revenuesfall into the hands of non-automotive players, especially in the used carsbusiness. Technology is one area where opportunities exist for OEMs tocapture and retain customers.

IAM wholesalers and repairers are in danger of missing the techno-logical turning. For these players, opportunities exist in capturing thegrowth within the old car market, and by sourcing parts in low-cost coun-tries. Fast fitters also face the difficulty of adapting their fast-fit businessmodel to keep pace with the leaps and bounds taking place in technology,and to sidestep competition from OEMs.

The opportunities for large dealer groups stem from sourcing partsoutside the OES channel, and acquiring new customers in the IAM channel.

Suppliers are confronted with threats arising from low-cost and non-OEsuppliers, which offload so-called ‘adaptable’products. They also face therisk of being locked out by OEMs and losing market access as a result ofchannel consolidation.

When insurers become more greatly involved in the spare partsbusiness, profitability comes under threat, as insurers are looking toreduce the end-user part price.

Market players will have to adapt and redefine their business strategiesas well as reshape their organization if they are to master these challenges.Should suppliers move downward in the distribution chain? Should largedealer groups step more expansively into the IAM wholesale business?Should insurers enter the wholesale parts business? Should fleetmanagement companies increase their role in the repair and servicebusiness? These are just some of the most pressing questions marketplayers have to consider.

Battles are being fought between various market players in the auto-motive sector to capture value along the vehicle lifecycle. Theremainder of this chapter aims to show which players are likely tocapture value and which are likely to lose out. The most importantquestion concerns the captive (for example, OEM-owned) versus non-captive business model (for example, independent players), which isomnipresent along the value chain. All activities ranging from used carsand parts to general and financial services are sources of value from the


OEMs’ captive solution, but also from alternative solutions provided byindependent players.

Before we plot the key trends dominating the European market, thedifferent activities related to vehicles such as fleet management, theused car business, repair and service, spare parts and financial serviceswill be investigated.

DEMAND EVOLVES: PROFOUND SHIFTSREDEFINE THE MARKET RULES

New cars: from product to mobility

Fleets: a growing intermediary between OEMs and the final customerThe professional car segment, the so-called fleet market, has developedsignificantly in Europe. The segment saw an average annual growth rateof 2.7 per cent between 1997 and 2001, and is likely to continue to grow at3.2 per cent each year through 2007 (Figure 7.2).


57

65

36 36

48

48

60

30 30

40

Fleet market development in Western Europe

16.5 19.3

16.0 15.4 15.1 14.8 14.4

1997 1998 1999 2000 2001 2002 2007e

Fleet market penetration

= 2001 = 2007 estimate

Germany UK France Italy Spain

CAGR = compound annual growth rate

CAGR+2.7%

CAGR+3.2%

Figure 7.2 Fleet market penetration and development in Europe (per cent)Source: Roland Berger Strategy Consultants

This development is powered by various factors including tax-relatedincentives. Vehicles increasingly form part of employees’ salaries,company cars are being used more and more as an instrument to motivateemployees, costs of mobility are rising, and customer attitudes towardsleasing are changing.

The fleet segment is driven by traditional rental companies (short-termduration rental, or STD), administrative bodies and private companies,but also by long-term rental fleets (long-term duration contracts, or LTD).

New car sales can be split among different channels – direct sales,branches and dealers – and among various customer types – private, democars, STDs such as Hertz and Avis, companies’ own fleets and leasers forLTD. The demo car segment, which consists of all vehicles purchased byOEMs for showrooms and dealers’ services, accounts for a sizeable shareof registrations (Figure 7.3).

This means that the share of professional customers among car buyers isexpanding, creating a new type of intermediary between end users and carmakers. The bargaining power of these intermediaries is intensifying.Professional customers are using their new-found clout to negotiate addi-tional specifications and lower prices.


OEM direct sales (31.1)

Branches and dealers(24.2)

Dealers and agents (40.8)

Democars(14.9)

STD (11)

Companies &organizations(9.1)

LTD (6.4)

31.5

6.4 2.9

9.0

14.2

2

6.5

3.5

Parallel imports (3.8)

Private individuals (58.5)

26.5

Figure 7.3 Car registration mapping in France (per cent)Sources: Roland Berger Strategy Consultants, registration data 2003

Full mobility service solutions tailored to specific needsCompared with the private sector, the demands of fleet customers arebecoming more specific, particularly when it comes to services expected,fleet management and maintenance.

This development is particularly true in the fast-growing LTD segment.The penetration of LTD rental among fleet customers is growing atbetween 8 and 10 per cent annually, with growth rates especially strong inthe small and mid-sized fleet segment (Figure 7.4). LTD contracts oftencontain more services than their STD equivalents. Maintenance servicesare included in 90 per cent of long-term rental contracts, and tyre servicesare to be found in 80 per cent, for instance.

End-customers want greater freedom and mobility. Fleet managementcompanies increasingly tend to demand à la carte services from OEMsand dealers to be able to meet customers’ expectations and to stand outfrom the competition. These services include maintenance, insurance,flow management (buying, delivery, reselling) and fleet management.Leasing and fleet management companies are hunting out OEMs that cansupport them in their strategic development. They expect support, forexample, in optimizing their geographical coverage, managing their spareparts and service contracts, and outsourcing technical support.


LTD penetration: 20

7

65

30

LTD annualgrowth =

8-10%

Key accounts(>100 vehicles) 20

Small and mid-sizecompanies(5–100 vehicles) 30

Private dealers(<5 vehicles) 50

x% Penetration rate of LTD within each fleet segment in percent

Figure 7.4 Penetration of LTD within each fleet segment (per cent)Source: Roland Berger Strategy Consultants

The ‘user chooser’ business model

Fleet management companies are also becoming more and moredemanding when it comes to selecting the vehicles they want. In the UK,34 per cent of fleets – the so-called ‘user choosers’ – give their customerstotal freedom when it comes to choice of vehicle. They do not keep to thestandard practice of proposing a panel selection.

The ‘user chooser’ business model is radically changing the fleetbusiness and transforming the relationship between fleet managementcompanies and OEMs. Fleet management companies are no longersigning contracts with one or two OEMs with whom they have preferredconditions, but are behaving more like private customers, with muchgreater bargaining power.

In our opinion, fleet management companies will become a largecustomer segment, capturing a significant share of value along the auto-motive lifecycle. Fleet management companies are in a strong position togain better services and more sophisticated offers from OEMs.

Fleet management companies are contributing to the development ofnew car sales, especially for expensive vehicles. Some high-range modelsare almost 100 per cent purchased by fleet management companies and nolonger by private customers.

Used cars: a lever to regulate overcapacities

The ‘nearly new car’ systemA used car is by definition a car resold after a certain period of time or acertain mileage. Recent-model used cars are becoming increasinglyimportant. Sales of used cars less than one year old have been growing at6.2 per cent annually since 1998. This is almost twice as fast as the usedcar market as a whole, which at 3.9 per cent annually is already growingmuch faster than the new car market.

This trend is partly explained by the growing number of fleetmanagement companies that resell recent vehicles, but a common practicecalled ‘zero mileage vehicles’ or ‘nearly new cars’ is also responsible forthis development. Nearly new cars are registered by the dealers them-selves and sold as used cars. This helps boost the dealers’ official marketshare, and it enables them to sell new cars at a used car price, which is at20 per cent discount, without making an apparent discount on new carprices. OEMs have encouraged this practice by giving STD fleets special


deals. STD fleets are given incentives such as margins of 1 to 2 per cent topurchase vehicles for a period of six months, after which the vehicle isbought back by the OEM and resold as a used car.

A common practice among dealers and car makers is to purchase vehiclesfor showroom purposes and internal use, before reselling the vehicles withvery limited mileage to customers. This is also pushing up the number ofsales in the recent used car segment. These vehicles accounted for 11 percent of new car registrations in Europe in 1999, and 15 per cent in 2003.This practice is especially prevalent in Germany, where ‘zero mileagevehicles’ have at times accounted for 25 to 30 per cent of new car registra-tions. This is facilitated by specific regulations that allow vehicles to beregistered for an interim period of time, such as six months.

These ‘flow regulation’ levers have been used widely by many OEMs toboost their market share, which is measured by the number of car registra-tions. OEMs also use this mechanism to regulate the structural problemendemic in the European market, namely the overcapacity of new cars.

Professionalism increases in used car managementThe used car business was once dominated by the private-to-privatesegment, helped along by various intermediaries such as specializednewspapers and the internet. In recent years, professional players havetaken over this business activity. The OEMs and dealers especially under-stand that buying back old cars is necessary in order to sell new cars tocustomers. On average, 60 per cent of used cars are bought back fromprivate customers and 40 per cent from fleet management companies orfrom OEMs (zero mileage). The share of the private-to-private segment isexpected to decrease from 56 per cent in 1999 to 44 per cent in 2007,while OEMs’ own subsidiaries and licensed dealers are likely to havecaptured 38 per cent of the market by this time (Figure 7.5).

The profitability of the used car business has risen significantly fordistributors, and it is now making a real financial contribution to theoverall profit and loss statements of distribution groups. What is alsonoticeable is the fast-growing share of used car brokers (+8.5 per centannually) who buy used cars from dealers and/or agents and resell them toprivate customers.

‘Nearly new cars’ create a vicious circleThe professional management of the used car business – especially the‘nearly new car’ practice – represents a risk for the overall industry. Inshort, it creates a vicious circle. The emergence of nearly new cars in themarket with a discount of 20 per cent on the new car price creates unfair


competition for ‘real recent used cars’, which are also discounted by 20 to25 per cent on new cars but have a mileage of 15,000 to 30,000 kilo-metres. This pulls down prices along the lifecycle and lowers the buy-back value. Since buy-back values are negotiated up-front by OEMs whenselling to fleet management companies (that is, at the beginning of theperiod), this price reduction creates a depreciation trap for OEMs.

Several OEMs have been hamstrung by this vicious circle. To avoidfalling into this trap, OEMs have to secure and control this activity betterthan before. OEMs especially have to control the way used cars flow intothe market. They must leverage their Europe-wide network againstregional and local distributors to create scale effect and synergies in themanagement of used car flows across Europe. A two-pronged approach isrequired: they should provide better service to customers while taking intoaccount the used car price gap that exists across countries – for instance, aused Clio has a higher market price in Germany than in France. Renault,for instance, has managed to implement a European used car database toquickly check used car availability across different European countries.

Players active in the used car segment are capturing value. New cars arelosing out as a result. The value captured by used cars is shared among


44

56

30

25

8

5138

56

SubsidiariesBrokers/dealers

Others

2007e1999

Private sellers

Licensed dealers/agents

CAGR+2.1%1)

-0.2%1)

+8.5%1)

+8.3%1)

+4.5%1)

-0.9%1)

1) Based on underlying absolute figures

4,896 5,782

Figure 7.5 Breakdown of used car sales by distribution channel (per cent)Sources: Observatoire de l’Automobile, CCFA, Roland Berger Strategy Consultants

more players than ever before. Dealers, agents, fleet managementcompanies and brokers all take their share.

Repair and service: technology threat for the pool of six-to-nine-year-old cars

Customers demand greater reliability and better satisfactionCustomers have grown accustomed to increasing service quality, frombooking flights to purchasing goods at a retail store, calling a telecomsoperator or buying a service from a bank. Service quality can be expressedin manifold ways, including immediate availability, rapid response torequests, limited waiting time, special allowance for delays, highcustomer attention and fidelity tools. It has become a weapon in thearsenal of tools companies use to differentiate themselves fromcompetitors. Service quality has become firmly embedded in the commu-nication strategies of companies in various sectors. This can be witnessedby their clear commitments: a rail transportation company guarantees‘reimbursement after a one hour delay’; an appliance hard discountercommits itself by stating that ‘we pay the price difference if you find itcheaper elsewhere’; and fast-food outlets guarantee a ‘waiting time under10 minutes’.

Improving customer experience is the underlying concept behind allthese marketing campaigns. Every contact with the company must be anenjoyable experience for the customer. His or her satisfaction is whatcounts. Many companies, including state-owned enterprises and evengovernment bodies, have sought out ways to improve customer expe-rience for the services they provide.

Despite efforts made in the automotive distribution sector, servicequality is still lacking compared with other industries, and customers’experiences could be improved. The nature of car distribution makes itdifficult to monitor and improve interfaces with the customer: this is onereason that car distribution trails other sectors.

Customers’experiences with car distributors are rather complex, rangingfrom buying a new car to having it maintained and repaired. And theencounters are quite emotional. The buzz of repairing a car might be over-shadowed by anxiety, and customers are never in a good mood when theyhave to leave their car at the repair shop. Additionally, the frequency ofinteractions with the customer is rather low. Customers do not go to theirdealer every week. Furthermore, the fragmentation of distribution, which


comprises OEM-owned dealers, contract dealers and agents, makes itdifficult to implement the sort of standardized service quality proceduresthat have become standard at airlines and banks, for example.

However, customer experience is essential in improving the perceivedvalue of the OEM’s brand. Customers’ purchasing intentions grow expo-nentially with the perceived value of the brand, meaning that a marginalincrease in perceived value significantly increases the purchasing intent(Figure 7.6).

Once the product, the brand image and the costs are in line with customerneeds, the quality of service received at the dealer or garage outletstrongly influences how the customer perceives the value of the OEM. Itweighs in at around 40 per cent for customers who have already purchaseda vehicle of the particular brand (Figure 7.7).

How can players in the automotive sector improve customers’ expe-rience? They must make the customer feel welcome, answer the phonequickly, inform the customer about what has been done to the car, giveadvice. They must ensure, for example, that the person who has checkedout the vehicle after a repair is briefed and informed by the person whochecked the car in. This enables consistent feedback about how the servicehas or has not met the client’s expectations.


Purchasingintention index

OEM brand perceived value index

0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10

+ 23 pts

+ 1 pt

Figure 7.6 Customers’purchasing intentions in relation to the perceivedvalue of the brandSources: Renault, Roland Berger Strategy Consultants

What customers expect from repairers in terms of quality of service hasincreased in past years. Reliability and trust is the number one issue forcustomers. The importance of reliability has jumped considerably over thepast decade, and it is now even more important than price (Figure 7.8).


Valuedrivers

Weight-ing ofdrivers

Customerexperience

Product Image Cost

Perceived value

Newcustomer

Existingcustomer

10

40

90

60

Figure 7.7 Importance of customer experience in OEM perceived brandvalue (weighting of drivers in percentages)Sources: Renault, Roland Berger Strategy Consultants

Reliability versus price index development(per cent)

Customers' repairer expectations(per cent)

12

21

24

25

29

29

41

65

Advice

No appointmentsnecessary

No waiting

Warm welcome

Reliability andtrust

Lead time

Price

Proximity

6561

57554845

374143

4644474644

20022001200019991991-1993

1994-1996

1997-1998

Reliability/trust Price

CAGR+7.9%

Figure 7.8 Importance of repairers’ reliability and prices for customersSource: Roland Berger Strategy Consultants

This means that repair and maintenance players need to display greaterprofessionalism if they are to capture and retain customers. Against thisbackdrop, it is likely that the OES channel and large branded repairnetworks will succeed, clawing market share away from independentoutlets. The success of the fast-fitters can be attributed to their excellentservice quality, standard procedures and codes of conduct – including dresscode, clear commitments – ‘no appointments’ and quick service delivery.

The car market: the focus turns to the six-to-nine-year-oldsegmentThe car repair and service expenditures profile is shifting along the carlifecycle. Expenditures on services including labour and spare parts aredecreasing (Figure 7.9). More importantly, expenditures are shiftingtoward older vehicles. In the past, the maximum expenditure was spenton three-to-eight-year-old vehicles. Now, it is spent on six-to-nine-year-old vehicles.

Several factors explain this trend. These include the increase in mean timebetween maintenance services or oil filter changes (even for older cars);the longer lifecycle stemming from anti-rust metal protection; fewer acci-dents owing to government action and also because of increased safetyequipment such as antilock braking systems (ABS); fewer broken


Vehicle age0 1 2 3 4 5 6 7 8 9 10 11

5.4

0.9

8.1

2.3

Car service expenditure is decreasing and the maximum expenditurehas shifted to six- to-nine-year-old vehicles

20031997

Total service expenditure

e16.7 bne15.7 bn

Figure 7.9 Car service expenditures by vehicle age in France in 1997and 2003 (in € billion, excluding tyres and lubricants)Source: Roland Berger Strategy Consultants

parts due to optimized vehicle architecture, more resistant parts such asplastic lights instead of glass, and more robust shock absorbers.

This trend is creating ground for battle between the OES and IAMchannels. The OES channel is traditionally very active with recent cars –that is with cars less than five years old, and new cars under warranty –and enjoys high end-user loyalty. The shift of revenues to older carsdirectly impacts the OES channel as it increases the likelihood ofrevenues being diverted into another channel. The IAM channel, whichgenerally addresses older cars, welcomes this trend, viewing it as anopportunity to invest in facilities to repair more recent cars (up to 10years old).

Car technology: a threat or an opportunity?The growing share of technology in vehicles is creating barriers that couldshake up the market. The penetration of technology in the car pool hasjumped considerably in the recent past (Figure 7.10).

With the rise of technology in cars, especially electronic hardware andsoftware, much better skills are required these days to perform a car diag-nosis. Although the BER forces OEMs to supply their repairers withappropriate diagnosis tools, a barrier is created because the tools are


Penetration rateby age group

Air-conditioning

ABSAirbag

Catalytic converter

20

34

51

60

68

2931

8086 87 89 91

60

75

8589

9

11

72

64

40

53

37

10 yearsand over

7– 9 years 5– 6years

3 – 4years

2 years 1 year Vehicle age

Figure 7.10 Technology penetration in the car pool in Europe, 2003(per cent)Sources: CCFA, Marketline, Roland Berger Strategy Consultants

extremely OEM-specific and expensive. This prevents IAM repairersfrom gaining relevant experience.

The improvement of car technology directly impacts fast-fitters, whoare now experiencing a reduction of their addressable market size, andhave no possibility of completing more complex repairs.

The market for service and repairs is turning into a battlefield. Newthreats are emerging for all players from increasingly professional servicequality expectations, shifts in car age, and from technology. But thesethreats also create opportunities for players capable of adapting theirbusiness model.

Spare parts: from a replacement to a retail approach

Captive spare parts are no longer immune from competitionRepairers and body shops are an important customer segment for IAMwholesalers, which supply them with ‘competitive’ parts. They are alsoimportant for OEMs via the OES channel. OEMs supply repairers andbody shops with ‘captive’ parts and OEM-proprietary parts for the bodyand chassis. They also supply them with ‘competitive’ parts that theypurchase from the tier 1 supplier panel and later resell under their ownbrand name and packaging.

Parts are replaced for three basic reasons: after accidents or crashes,when they fail to work or are damaged, and because of wear and tear.Accidents and crashes mostly concern body parts such as bumpers, sidepanels and front panels. Four to five parts are broken in 60 per cent ofcar accidents. Radiators, scratched bumpers, air-conditioning, wind-screen and lighting are the parts that require replacing because of failureor damage. And finally tyres, oil filters, brake pads and shoes, as well asexhausts, are often replaced because of wear. Technical improvementsmean that these wear-and-tear parts need to be replaced less frequentlythan in the past. Tyres, however, are an exception. Most drivers believethat tyres have to be changed every 40,000 kilometres, but tyres thatneed replacing after 15,000 kilometres’ wear are becoming increasinglycommon: the new Laguna is just one example among many. Improvedbraking distance and vehicle stability has seen tyre size and adherenceincrease (from 14-inches to 17–18-inches). This pushes up the costs oftyres and increases wear and tear. Tyre makers benefit from this devel-opment, as do other players such as fast-fitters, which are jumping at


this potentially life-saving opportunity. The wear-driven spare partsmarket is already highly competitive, with a specific distributionchannel comprising fast-fitters, tyre specialists and the like, and will notbe described in this chapter.

The accident-driven spare parts market has been largely immune fromcompetition because it mostly comprises captive spare parts (eg OEMproprietary), which are replaced at the body shop. An examination of thespare parts volume purchased by body shops to repair cars after an accidentshows that OEM captive parts represent around 77 per cent of total volume.This means that 23 per cent of parts could potentially be purchased in theIAM channel. This ratio is very likely to change in the coming years with theintroduction of the Eurodesign regulation, since this allows other suppliers todevelop captive parts without manufacturer agreement. Eurodesign alreadyoperates in some countries including Spain and the UK, but not yet in Franceor Germany. The introduction of Eurodesign could potentially reduce theshare of captive parts from 77 to 25 per cent in the long term (Figure 7.11).This development would change the battlefield in favour of supply repairersand body shops by potentially allowing them to supply significantly moreparts from the IAM channel or from low-cost countries.

Eurodesign covers OEMs’ proprietary parts. It also encompasses all partswith proprietary design that may have been developed by tier 1 suppliers


75 per cent ofspare partscould potentiallybe substitutedafter Eurodesign

Before Eurodesignevolution

After Eurodesignevolution

25

77

52

2323

Non-captive parts:• Lighting• Condenser• Radiator• etc.

Captive parts:• Body parts• Chassis• Specific parts

Addressable market for equivalent part/OE quality

Figure 7.11 Impact of Eurodesign on accident spare parts (per cent)Sources: Insurer databases, Roland Berger Strategy Consultants

such as lighting, rear lamps and seats. Low-cost suppliers are emerging asa threat. Spare parts that already fall outside of Eurodesign, such as radi-ators, filters and spark plugs, are also being threatened by low-costsuppliers. Non-OE suppliers have captured a 40 per cent market share ofthe IAM channel with these sorts of parts.

The degree of impact low-cost suppliers have in various countriesdepends on whether or not Eurodesign is applied. The penetration rate oflow-cost adaptable parts suppliers is most striking with old vehicles becausethe end-user is extremely cost-sensitive. The owner will likely not resell thevehicle and often receives no insurance reimbursement. That is why end-users try to have repairs done at minimum cost. When it comes to the oldervehicle segment, end-users search for the cheapest solutions themselves,even down to spending time at the scrap yard to find a reused part.

Reused parts are also capturing a sizeable market share. In some coun-tries, including France and Germany, Eurodesign prohibits adaptableproducts, and the reused segment is much more developed as a result.Reused parts account for almost 20 per cent of the lighting IAM in France,for example. Once adaptable products are allowed to be sold, however, thelow-cost adaptable category grows very fast. This has been the case inSpain, Italy and Eastern Europe. Players such as the Taiwanese headlampmanufacturer TYC have already captured a strong market share in Spainand Italy, and particularly in Eastern Europe.

Spare parts wholesaling: competition heats up for repairersand body shopsIf we break down the cost of repairing a car, we see that spare partsaccount for more than 40 per cent and labour costs make up more than 50per cent (Figure 7.12).

When it comes to the level of service and quality of supply, body shopsare becoming increasingly sophisticated. With the implementation oflarge-scale facilities (for example body shop factory concepts) that arecapable of repairing 200 cars each week compared with the average-sizedbody shop that manages to repair 20 cars a week, it is clear that body shopsare becoming better organized and more professional. One of the mosteffective ways to improve the profitability of body shops is to reduce thetime a car spends on the premises during a repair. The immobilizationtime directly increases the cost of repair and reduces the vehicle slotturnover. Missing parts or parts that do not exactly fit the car and need tobe adjusted are the most frequent reasons for increased immobilizationtime. A large diversity of parts need repairing after an accident (Figure7.13). Even though only six parts on average are wrecked in an accident,


the 10 parts that most frequently need replacing represent only 22 per centof the total crash parts volume.

As soon as body shops and/or repairers become more professional, theirneeds from parts suppliers – OES, OEM dealers, wholesalers – rank asfollows: first, efficient tools to identify the correct part number; second,


42

6

52

Spare parts

Paint

Labour

Typical cost of repair

Figure 7.12 Breakdown of typical repair costs (per cent)Sources: Rechange Automobile, Roland Berger Strategy Consultants

Top 10 crash parts(volume per cent)

Ranking of the parts most frequentlydamaged (volume per cent)

2213

18

8

39

Total Other 51st–90th

21st–50th

11th–20th

Top10

50 parts cover only 60%of crash parts volume

2.0

Licence plate

Front door

2.0

Front bumper

1.9

Bonnet

1.9Radiator grill fitting

4.3Headlamp

3.2Rear end

3.0Front tank

2.6Radiator grill

2.1

Front rims 2.4

Figure 7.13 Parts most frequently damaged in accidentsSource: Roland Berger Strategy Consultants (analysis based on database of 166,000accidents)

relevant technical support and documentation; third, availability of theoriginal part and/or a part that fits perfectly; fourth, the commercialrebate. Interestingly, the rebate criterion is becoming less and lessimportant, because the price difference is largely cancelled out by theadditional work-hours required if the part does not fit.

Body shops are stepping up their efforts to purchase the exact set ofaccident parts for a given model, under the ‘accident part offer’ idea.Multi-make wholesalers are unable to implement this offer because of thehuge complexity involved in cataloguing, logistics, IT and so on, and thedifficulty of covering the entire spectrum of parts: the likelihood of havingall parts damaged by accidents in stock or in catalogue for a given modelexponentially diminishes with the number of parts involved. The onlyplayers that can supply such accident part offers are the OEMs. This givesthem a significant competitive advantage.

While it is much more convenient for body shops to bundle thesupply of all the parts they need to the OES channel, the IAM channelactually offers more aggressive discounts, provided its referencingsystem is reliable and user-friendly, allowing correct parts to be easilyidentified.

A battle is being waged between the IAM and the OES channels fororders from body shops and repairers. The intensity of this battle differsbetween countries. In France and the UK, most body shops bundle theirspare parts in the OES channel because OES dealers are strong and canoffer discounts similar to those given in the IAM channel. Additionally,they have significantly improved the efficiency of referencing and/orordering tools. These days, the body shop finds the parts it needs simplyby entering the vehicle plate number.

In Germany, most body shops do not bundle their orders. Instead, theypurchase competitive parts in the IAM channel from players such asTemot and ATR because they offer more aggressive discounts (15 per centor more), and provide efficient referencing tools as well as technicalsupport. In Spain, the situation is balanced. Neither of the channels has yetwon against the other.

The spare parts wholesale activity will also be subject to major changesin the future, driven by the introduction of adaptable and low-costsuppliers, and by a more open market. Some OEMs are intensifying theirefforts to win a share of the spare parts wholesale market. Renault, forinstance, has implemented a huge dedicated sales force of around 500people to sell spare parts, which should improve its chances whencompeting with traditional IAM wholesalers. Some IAM wholesalers,such as Temot and ATR, have also made significant progress by offeringrepairers efficient referencing tools and technical support.


The financial services challenge

A highly attractive segment coveted by non-automotiveplayersSlowly but surely, Europeans are increasingly using credit to financepurchases. Credit use is highest in the UK and Germany and lowest insouthern European countries, thus reflecting typical consumer habits inEurope (Figure 7.14).

The automotive credit market is attractive to financial institutions becauseit provides them with a lever to penetrate consumer segments with highpotential including youth, family (more than one car), rural areas or smallcities, and income potential. Given its attractiveness, it is understandablethat many players are interested in securing a share of this market. Theseplayers can be grouped into two segments: captive financial institutionsand non-captive financial institutions. Captive financial institutionsconsist of OEMs’ own financial services providers, operating under eitherprivate labels or the OEM brand. Private labels are generally financialservices providers that were previously independent and have since beenbought by an OEM. Non-captive financial institutions are either inde-pendent financial institutions or the leasing subsidiaries of commercialbanks (Figure 7.15).


0

50

100

150

200

250

300

France

Germany

UK

SpainItaly

19941993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Development of outstanding credit in five European countries(e billion)

3.3 1.4

7.6 3.9

8.3 5.011.2 11.7

9.3 11.7

CAGR(per cent)

2000-2004

1993-2000

Figure 7.14 Outstanding credit in five European countriesSources: Observateur Cetelem, Roland Berger Strategy Consultants

Although the financial services business is not a core activity for carmakers it is highly profitable. Since captive financial institutions haveaccess to the customer at the point of sale they have developed rapidly.Finance and insurance activities generally have higher ROCE than carsales. As well as providing higher profitability, these activities alsoprovide more stable profits and sales when the core car business islanguishing. Financial services activities also help car makers in the warfor customers and in bolstering customer loyalty. Customer retention isboosted through effective customer relationship management or by influ-encing repurchase behaviour, by providing customers with financialoffers that enable them to make a purchase sooner. New customer acqui-sition arising from complementary financial services cross-over is anadditional advantage.

If we look at the overall expenditure related to a car throughout its life-cycle, financial services account for 24 per cent, with straight financingaccounting for 9 per cent of this (including leasing) and insuranceaccounting for 15 per cent. OEMs increasingly rely on their financialsubsidiaries to contribute to profit. As well as being able to boost sales andearn extra profit, financial subsidiaries also help OEMs stabilize theirprofits in times of crisis.


1) LeasePlan is considered to be ‘non-captive’ in this chapter

Non-captives

Independentfinanciers

Sixt

FFS Bank LeasingVersicherung

GE Capital Bank

Commercial banks

Deutsche Bank

EBV

Dresdner Bank

VR Leasing

ALD Automotive

Sparkasse

Santander ConsumerCC-Bank

Captives

Automotive banks

Volkswagen FinancialServices AG

Daimler ChryslerBank

BMW FinancialServices

Toyota FinancialServices

GMAC FinancialServices

Renault Bank

Ford FinancialServices

White labels

Europcar FleetServices

Premium FinancialServices

Alphabet

LeasePlan1)

Figure 7.15 Categorization of automotive financial service providersSource: Roland Berger Strategy Consultants

Automotive trends are changing the credit battlefieldTwo trends in the automotive sector strongly influence how automotivecredit is purchased. First, the growing share of fleets and the rental businessmodel drive the share of automotive credit not purchased at the dealer pointof sale. Thus it does not necessarily fall into the hands of captive financialservices providers. Second, the growing share of the used car segmentcreates a new attractive segment for financial services, since more andmore used cars are being purchased with credit (Figure 7.16).

Each player’s strategy differs according to whether the credit is purchasedat the point of sale or outside the point of sale. The ‘outside point of sale’segment is increasingly dominated by non-captive financial institutionssuch as banks that are directly contracted by fleet management companiesand intermediaries, whereas the ‘point of sale’ segment is largely domi-nated by the captive and specialized credit institutions of OEMs. Withoutthe presence of OEMs’ in-house fleet management companies, non-captive financial institutions would completely command the fleetmanagement market (Figure 7.17).

The attractiveness of the fleet management segment means that playersare pursuing various strategies in an attempt to garner market share.Captives are focusing on fleet management and full-service leasing solu-tions, establishing additional ‘white label brands’ to serve multi-brand


Penetration rate of car credit in 2003

32.5

49.5

18

Creditpurchasedat thepoint of sale

Creditpurchasedoutsidepoint of sale

No credit

Used car (75)

53

25

39

36

12

New car (25)

35

(Used and new cars purchased byprivate customers, per cent)

ExampleTrendPenetra-tion rate

PlayersO

utsi

de

the

po

int

of

sale

At

the

po

int

of

sale

• Cofica CU• Sofinco/Viaxel• CGI• GE Money Bank

7%Specia-lized creditinstitutions

• VW Bank• Credipar, Diac• Fiat Crédit, Ford

Crédit

10%Captives

• Cetelem• Sofinco• Cofidis

5-7%Specia-lized creditinstitutions

Major automotive credit players in France

• Crédit Agricole• BNP Paribas• Deutsche Bank• Santander

40-48%Banks

Figure 7.16 Major automotive credit players in France and thepenetration rate of car creditSources: Observatoire de l’Automobile, Crédiscope, Roland Berger Strategy Consultants

customers, and offering complementary bank services such as that offeredby Volkswagen Financial Services. Independent non-captives, usuallyactive in large fleets, are progressively extending their offers to smallfleets and even private customers with new concepts such as ‘leasingunder a different name’ (Figure 7.18). Non-captive commercial banks aresetting up or acquiring leasing subsidiaries to extend their financialservices portfolio. ALD is a good example in this respect. Non-captivecommercial banks are also approaching dealers more aggressively withmore attractive financing offers, and sometimes even approaching privatecustomers. Sixt immediately springs to mind in this context.

Automotive credit is a tantalizing segment. Used car credit is thegrowth driver compensating for stagnation in new car sales. Traditionalcaptive financial services providers are being challenged by non-captivefinancial institutions that take advantage not only of the ‘outside point ofsale’ segment, such as fleet management companies and large dealers, butalso of used car intermediaries.


1) Europe only, 1.1 million worldwide

Owned by

Volkswagen AG, 50%;Olayan Group, 25%;Mubadala, 25%

BNP Paribas

Société Générale

Volkswagen AG

N/A

DaimlerChrysler

RCI Bank

General Electric

General Motors

ING

Company

Leaseplan Corporation

PHH Arval

ALD International

Volkswagen/Europcar

Athlon/Fleet Synergy

DaimlerChrysler Services

Overlease

GE Fleet Services

Masterlease

ING Car Lease

Country

NL

F

D/F

D

NL

D

F

US

UK

D

Size of fleet (000 vehicles)

6501)

600

545

315

310

310

278

220

170

155

Figure 7.17 Leading European providers of fleet management servicesSources: Fleet Europe, Datamonitor, Roland Berger Strategy Consultants

THREATS AND OPPORTUNITIES CREATE NEWCHALLENGES

Dealer groups: the relationship challenge

Dealer groups have consolidated in recent years. They have becomeincreasingly important players, with dominant positions in certain regionsand areas within the national landscape. In the UK, large dealer groupssuch as Dixon, Arnold Clark and Reg Vardy have been established forsome time. These players sometimes have a local market share of morethan 50 per cent within their customer areas (Figure 7.19).

In France, for example, the top 100 distribution groups account for 46per cent of the market and are particularly well developed. AlthoughGermany has a few large players, dealer groups there are still highly frag-mented. French dealer groups have grown mainly by acquiring multiplefranchises. Between 1999 and 2002, the share of the French marketcontrolled by the top 100 distributors grew faster than the total market (acompound annual growth rate (CAGR) of 4.8 per cent versus 0.3 per cent)(Figure 7.20).


Fleet management

Pro

duc

tsSize of customers' fleet (no. of vehicles)

Captives

Privatecustomers

< 5

Commercialcustomers

Small fleet:5–20

Fleetcustomers

Large fleet:> 20

Independentnon-captives

Commercialbanks

Leasingsubsidiaries

Full-service leasing

Maintenance

Insurance

Operating leasing

Residual value leasing

Loan financing

Complementarybanking services

Figure 7.18 Strategies taken by leading financial services providersSources: Fleet Europe, Datamonitor, Roland Berger Strategy Consultants

Dealer groups are generally positioned with the following characteristics.They often have a multi-mono-make portfolio, meaning they haveseparate contracts with several OEMs; they display a strong concentrationin one geographic area; they leverage local scale effects; they boast a


1) 2002 figures 2) Including international activities

1,901PGA

580Schuller

566Bernard

555Zodo

539Guedet

801MAHAG1)

760AVAG 2)

600Schultz

452

Dello 350

Weller

Itra

DomingoAlonso

198

800

217

231

Huertas

Quadis

Rossello

177

France Germany Spain

EUR 3.0 bn EUR 1.6 bnEUR 4.2 bnTotalsales

Approx. 8,300Approx. 23,500Approx. 17,400Totaldealeroutlets

Figure 7.19 Top five automotive dealer groups, 2003 (sales in € million,total dealer outlets with service contracts)Source: Roland Berger Strategy Consultants

4.8%

0.3%

-1.0%

4.5 pts

100

110

123

115

100 99102

97

101

107

101

1999 2000 2001 2002

Top 100 automotive distribution groups grow fasterthan the market (number of new cars sold in France:Index 100 in 1999)

Sales breakdown of new carregistrations in France in 2003(per cent, excluding fleets)

Top 100

Total market

Rest of themarket

CAGR1999–2002 OEM subsidiaries

and branches

5

Top 100 automotivedistribution groups

Other concessionsand agentsUnofficial imports

20

40

35

Figure 7.20 Growth and market shares of the top 100 automotivedistribution groupsSources: Résoscopie supplement 2001–2002–2003, Roland Berger Strategy Consultants

strong relationship with end-customers; and they have the financial powerto invest in other related businesses such as rental and mobility services.

Dealer groups are currently heavily reliant on OEMs, especially withregard to spare parts, which they purchase from the OEMs’ parts andaccessories (P&A) department. However, given their size and potentialbargaining power, dealer groups are becoming attractive targets for spareparts suppliers or even IAM wholesalers from whom they could poten-tially get better rebates. In the medium term, we believe that dealer groupswill source many parts directly from suppliers instead of buying fromOEMs. Recent acquisitions of IAM wholesalers by dealer groups supportthis. It is a clever tactical move that allows dealer groups to have a foot inthe IAM market while avoiding breaking the sacred rules with OEMs.

The structure of the market is likely to change significantly in the comingyears, especially because of the shift made by automotive distributiongroups (Figure 7.21). The figures above represent the average discountrate. Today, quite a large silo exists between the IAM and OES channelsbecause of so-called OE parts. These parts were once in the domain of theOES channel. Following BER, an OE part can be sold in any channel. Theimplication is that the IAM and OES channels will become more porousand develop into a more traditional supplier–distributor model.


Manufacturers

Repairers

Automotivedistribution groups

Inventory/product range

47/50 40 40

OEM IAM

70/75 62

47/50 40 40

OEM IAM

70/75 80 62

Original parts Equivalentparts

Original parts Original partsEquivalent parts

Switch between channels at theautomotive distribution group level

Strong silos between OEMchannels and IAM

80

Historical situation Likely development

Figure 7.21 Automotive distribution groups are closing the OEM andIAM channel silo (figures represent the average discount rate)Source: Roland Berger Strategy Consultants

Aside from P&A, the sheer size of dealer groups will also enable them tobetter leverage their strong multi-make regional position. They have the sizeto optimize the used car process across different car makes and to developservices with greater outreach, for instance loans, leasing and renting, aswell as to develop relationships with customers at the local level.

The challenge for dealer groups is to master the transformation from amulti-make dealers’ network into a regional integrated player. This chal-lenge is multifaceted and requires well thought out actions. Dealer groupsneed to improve customer relationships throughout the lifecycle. Thisinvolves making better use of their multi-make portfolio to providecustomers with appropriate mobility solutions. Dealer groups are alsowidening their services offer by launching new services such as car rentaland financial services. Repair and service activities are improved by devel-oping the multi-make body shop factory concept and developing partssourcing directly from suppliers, for instance. Under the revised BER,dealer groups are theoretically allowed to source parts directly from theequipment and/or parts supplier. By skipping over one rebate level, theycould get better price rebates. Such action is best suited for older cars lessthan 10 years of age because these vehicles appear less frequently on theradar screens of OEMs. Dealer groups also face the challenge of devel-oping the wholesale parts business. Their size enables them to providecompetitive wholesale offers to repairers with similar high-performancelogistics and services levels to those offered by large IAM wholesalers.

Of course, these challenges will not be surmounted without OEMs. Therelationship between dealer groups and OEMs will become increasinglycritical. The impressive size of both players creates a mutual dependency.The challenge is to develop a win–win situation with OEMs, whileprogressively increasing the level of independence.

IAM repairer and wholesalers: the technology challenge

At repair level: consolidation toward affiliated networksIAM repairers will face significant challenges in the future. They willhave to cope with increasingly sophisticated vehicle technology, and getbetter at diagnosing problems, as well as serve more demandingcustomers. IAM repairers will have to improve their skills and changetheir repair practices in the light of these factors.

IAM repairers’ affiliation with networks is growing. IAM repairers aretaking this step to benefit from greater training support and access to tools,


which enables them to tackle more sophisticated car technology. Thenumber of affiliated repairers has grown constantly in past years, much tothe detriment of independent repairers (Figure 7.22).

Large affiliated repairer and body shop networks have emerged whichspecialize in different areas: these include body shop repairers (mainlysharing painting and body expertise), insurer networks, and partswholesaler networks. By joining forces, these networks could betterleverage their size. This would mean that they could share diagnosticabilities and better develop partnerships to complete the multi-brandoffer. Branded networks would also help further improve the customerexperience, but the most critical issue for repairers is changing theirrepair habits. The way to identify the root cause of a problem with avehicle is changing. The empirical approach to repairing cars –deducing the cause of a breakdown from a set of symptoms – will soonno longer be applicable. With all the various electronic systems builtinto vehicles, the same symptoms can have many different root causes.New methodologies, for example root cause analysis and AMDEC, willhave to be acquired by the repairer to properly diagnose vehicleproblems. Repairers today are hardly trained to deal with this new environment.


SpainGermanyFrance

355

280

300

235

300

150

200

90

52852

2001

1,110

2004

TopCarrosserie

Acoatselected

Five star

Axial

ADCarrosserie

9.2%

995

800

680

650

600

4,503

2003

1,400

1,350

1,140

Centro

2004

18.6%

Coparts

Temot

Carat

5,340

ATR

1,140

1,088

210216

512

818

1,490

3,246

2003

191230

586

819

1,500

3,326

2004

2.5%

BYG

Gecorusa

Cecauto

GAU

AD Parts

Annual growth Annual growth Annual growth

Figure 7.22 Number of repair and/or body shops affiliated to a networkin France, Germany and SpainSource: Roland Berger Strategy Consultants

At wholesale level: consolidation toward large buying groupsIAM wholesalers are consolidating into large-scale purchasing associa-tions, with strong technical support and a large network of in-house oraffiliated wholesalers and repairers. Independent wholesalers andrepairers are the losers in this development, since they are unable tocompete against the consolidated groups with their better price condi-tions, modern technical support and order flows.

Large IAM wholesalers are now present in three major countries, andhave significant clout in the market (Figure 7.23). In Germany, networkssuch as Carat, ATR and Temot (which includes MAHAG) are extremelypowerful and high-performance players. Large IAM wholesalers arediversifying into more service activities, taking advantage of the declineof independent players.

The large IAM wholesaler Auto Distribution, for instance, covers alllevels in France, from purchasing associations to end-customers. Its activ-ities encompass a parts purchasing association with sales of around€1,044 million and over 700,000 parts numbers, a network of distributorswith around 200 companies and 680 points of sales, seven specialist


Note: a minority of wholesale outlets belong to more than one cooperation

Approx. 1,100 (300) Approx. 3,000 (N/A)Approx. 2,000 (N/A)Totalnumberof outlets

France Germany Spain

670

400

1,500

130 7 (tbc)

250(153)

242(140)

576(195)

Sales Outlets

3G

Cecauto

AD

Starexcel

7001)

1,200

1,200

6201)

5601)

200 (4)

500(151)

87 (17)

128 (4)

115 (16)

ATR

Temot

Carat

Coparts

Centro

380

1502)

368

132

259

155(70)

390(304)

402(28)

260(28)

52 (11)

GAUEspana

Cecauto

AD Parts

CentroHolding

Serca

Figure 7.23 Top wholesale cooperative groups in France, Germany andSpain, 2004 (sales in € million, and number of outlets)Sources: Company websites, specialized press, Roland Berger Strategy Consultants

service and repair networks and an internet portal with databases(products and services) and information regarding prices and suppliesavailable online.

IAM wholesalers face a handful of key challenges. Leveraging theirclout across Europe will become an important factor. These corporationsare driven too much on a national level, even when international coordi-nation exists. This is because of the ownership structure, which is oftennot consolidated or frequently structured in the form of associations. Tocompete with the large dealer groups and OEMs which are increasinglycapturing market share and channelling it into body shops, IAM whole-salers would be wise to improve their technical support, parts referencingand coverage, and to deliver excellence in logistics. Technical supportmust also be efficient. This will mean implementing in-house andcentralized testing and diagnostic skills, and offering online tools. Gettinga grip of expanding sourcing capabilities to low-cost countries with OE-quality products is also important. By taking a retail approach to productcollection, they could also broaden their product offering. This couldmean going beyond OE products.

Fast-fitters are a specific subsegment of IAM players. Their businessmodel in the long term appears risky for the following reasons. First, theyface strong competition from incumbent players – that is from OEMs anddealers – who propose similar services bundled with car maintenance.Renault Minute is a pertinent example here. The market is also shrinkingbecause of the decrease in failure parts that need replacing such asexhausts and filters. Fast-fitters are also neither equipped to tackle thetechnology challenge nor able to diversify into other areas. One short-term opportunity they are all grabbing is the tyre aftermarket, which incontrast to other fast-fit parts is growing.

To maintain their position, fast-fitters will have to expand geographi-cally, requiring strong financial backing. Developing alliances or partner-ships with potential prescribers such as fleet management companies orinsurers would also be helpful. In view of the growing competition, fast-fitters must be vigilant in providing excellent service quality.

Insurers: the influential challenge

The influence and role of insurers in the automotive aftermarket isgrowing. Aside from the end-user, insurers are the only market player witha strong interest in lowering the price of spare parts. The influenceinsurers have on the price of parts starts well before the vehicle islaunched on the market. The Allianz Danner test, for instance, carries


particular authority for OEMs. It consists of a low-speed crash test and ameasure of the cost of the basket of spare parts needed to repair thevehicle. This famous test is used by all insurers, and forms the basis fordefining insurance fees for any given car model.

Nearly all insurance companies have adopted the Danner test as thebasis for claims, and it greatly influences the product developmentstrategies taken by OEMs. There are valid reasons for this. End-users whohave access to the test results, which are available in most automotivenewspapers and magazines, are becoming increasingly sensitive to totalcosts, especially in Germany where repair costs are much higher than inother European countries. Furthermore, it is essential to have good scoresin order to be referenced by fleet customers, as fleet customers represent asignificant share of the market volume for OEMs.

As a consequence, most OEMs are improving their products at thevehicle development stage to reduce the number of broken parts that endup in the basket. Repair costs have dropped significantly in recent yearsbecause of technical improvements. For the same test conditions, the costto repair an Audi 80 produced in 1978 was €5,200. In contrast, an Audi A4produced in 2001 cost €3,900 to repair taking inflation into account.

Beyond technical improvements, the pricing strategy of OEMsregarding spare parts is also influenced by insurance test results. OEMscurrently optimize the price of spare parts to meet the ‘Danner basket’ bylowering the price of certain parts found in the basket and increasing theprice of others. Spare parts pricing is a complex mechanism, the logic ofwhich is very difficult for external observers to understand. The pricing ofspare parts is not only influenced by the results of insurers’ tests, but alsoby various other criteria. OEMs are the only players that have managed tomaster this game.

The criteria for pricing parts include vehicle range. Even if a part isexactly the same across models, which is often the case due to theplatform strategy followed by many OEMs, prices of parts are not iden-tical and can show substantial differences, for instance between a VW andan Audi. The country’s competitive environment is also a criterion. Hereseveral factors need to be taken into consideration, such as the presence oflow costs, the existence of Eurodesign, and the weight of IAM whole-salers. Whether or not parts are captive is another consideration. Trade-offs are made on purpose, as the example of Renault shows. Renaultrecently modified its prices by pushing through higher rebates on compet-itive parts and lower rebates on body parts. As a result, the price of spareparts can become fairly disconnected from industrial costs.

Taking this into consideration, it is understandable that insurancecompanies want to increase their level of control over the price of spare


parts. Three basic strategies or models are being developed by insurancecompanies: ‘sell’, ‘select’ and ‘buy’.

� The ‘sell’ strategy consists of focusing volumes to selected body shopsand negotiating prices with the wholesalers. This approach requireslarge-scale communication to body shops as well as incentives,including pick up, delivery and replacement cars. It provides reach toaround 60 per cent of customers.

� The ‘select’ strategy consists of referencing a reduced number of bodyshop partners by developing multiple partnerships with body shopnetworks. This implies a new distribution of roles between bodyshops, the insurance company and the expert.

� The ‘buy’ strategy goes even further and consists of creating apurchasing structure to negotiate contracts with spare parts suppliers.Some cost reductions are shared with body shops.

‘Sell’ and ‘select’ approaches are a prerequisite for the ‘buy’ strategy. TheUK is the country that is the most advanced in the latter practice. InFrance, the ‘sell’ and ‘select’ models are developing quite fast. Taking onthis approach requires insurers to steer clients towards a selected networkof body shops to achieve volume commitments made with the body shopnetwork. Volumes stemming from guidance given by insurers can besignificant for body shops, and can represent up to 35 to 40 per cent oftheir activity. As shown in the example of France, the level of guidancefrom insurers has increased markedly in recent years (Figure 7.24).

The influence of insurers varies significantly across countries inEurope. It is the most influential in the UK, and is becoming progressivelymore so in France. But the situation is very different in Germany, wherethe insured customer has the freedom to choose between a direct cashpayment and vehicle repair. The customer is also free to select the locationwhere the repair work should be conducted. Repair and body shopsalways make use of one-time agreements with insurers to regulatepayment flows. This explains why the level of guidance of insurers tocustomers is much lower in Germany than it is in France (10 per centversus 40 to 60 per cent).

Insurers can play an even more important role, as the example of the UKshows. UK insurers have achieved a 75 per cent guidance rate and areincreasingly becoming purchasers. This has a substantial impact on labourrates and on the cost of parts. For example, Direct Line and Norwich Unioncovered 50 per cent of the private market in 2003 and achieved hugeguidance rates: 85 per cent for Direct Line and 65 per cent for NorwichUnion. Moreover, some OE-equivalent or adaptable parts are also referenced


by approval bodies such as Thatcham, and are prescribed to repair a car. InFrance, insurers only prescribe OE parts because the expert becomes liable ifa problem occurs as a result of replacement by a non-OE part.

Parts suppliers: the market access challenge

Parts suppliers basically sell products using the OEMs’network and underthe OEMs’ brand or via the IAM channel with a private brand such asHella, Valeo or Bosch. Although BER has theoretically made it morefavourable for suppliers to sell more OE products in the IAM channel, thishas not translated into practice. Parts suppliers are increasingly beingsqueezed on several fronts. They face substantial and growing pricepressure from the OEM channel. In the IAM channel, they are confrontedwith larger buying groups, progressively looking for alternative products.Regulation trends also do not make life easier for parts suppliers. Non-OEparts are gradually being allowed to be sourced from low-cost countries.The growing OES channel and the subsequent shrinkage of the IAMchannel in several markets increases pressure on parts suppliers, as itreduces market access for suppliers’ private brands. Price pressure frominsurers is also a considerable factor.


Change in guidance rate(per cent)1)

1)The guidance rate measures how many clients go to the garage or body shop recommended by the insurer afteran accident

7

40

50

Repair costsin 2003

e 5.8 billion

• Bank insurance, eg CA,Crédit Mutuel

• General insurance agents (36%)• Brokers (4%)

• Mutuals, no brokers, eg Macif • Insurance company branches

• Direct sales, eg directassurance (AXA)

320082003

20–400–20

70–8010–30

70–8060–70

Weight of insurers(per cent)

Figure 7.24 Insurance guidance rate development in France – insurers’guidance level likely to exceed 70 per cent by 2008Sources: DRI 2002, Sidexa, Roland Berger Strategy Consultants

Parts suppliers would most likely benefit from taking a more proactivestrategy toward the market. This could include marketing at the repair andwholesale levels, introducing a pricing and brand positioning that enablesdifferentiation according to the level of competition for individual parts,addressing large dealer groups, and exploring all potential growth oppor-tunities, including accessories, niches and other countries.

Market changes offer parts suppliers new ways to capture value(Figure 7.25).

Captive and non-captive financial institutions

Captive and non-captive financial institutions have very different marketpositions. At the point of sale, captive financial institutions have adominant position, with clear competitive advantages achieved by lever-aging integrated offers such as buying back a used car, selling a new car,financing the vehicle and providing services. This allows OEMs to maketrade-offs between the level of credit granted, the rate applied, the used carbuy-back price and the rebate on the new car. Credit provided by captivefinancial institutions at a 0 per cent rate is commonplace. The reason issimple: the OEM has already negotiated a cheaper buy-back price for theused car.


Current spare parts flows Future spare parts flows

Logistics

Wholesalers

Customers

Suppliers

Central parts & accessories

Makers' subsidiaries

Others/fast fit

OES

Multi-make groups

OEM parts(makers) Other suppliersEquipment suppliers

OES IAM

RepairersAgents

Purchasingassociations

Superwholesalers

Wholesalers

Figure 7.25 Potential changes in spare parts flowsSource: Roland Berger Strategy Consultants

Captive financial institutions have to tackle a number of issues. Theirlack of financial expertise would suggest that improving scoring capabil-ities should be a priority. Developing the used car financial services modelas well as offering additional financial services for customers, such as retailbanking services, would help them improve their standing. This laststrategy is especially favoured by German OEMs, which excel in this area.The next subsegment of the chapter is dedicated to exploring this model.

Captive banks: the German exceptionVolkswagen, DaimlerChrysler and BMW are the only OEMs to offerretail banking services in their domestic market. Although OEMs’financing activities are maturing, retail banking follows a steady andregular growth pattern. The bank deposits of VW Financial Services haveincreased by 26 per cent each year since 1998, amounting to €8.7 billion(Figure 7.26). VW Financial Services is among the top 10 Visa cardproviders, one of the leading direct banks and the eighth largest insurancecompany in Germany. The bank deposits of BMW Bank have alsodeveloped significantly since 1998 (at around 31 per cent annual growth)and totalled around €3.8 billion in 2003. Bank deposits atDaimlerChrysler Bank, which was created in 2002, grew from €0.8 billionto €3.1 billion between 2003 and 2004.


Sales in financial services(e billion)

Operating margin in financial services(per cent)

6.0

1998

6.5

1999

8.2

2000

8.7

2001

9.5

2002

10.4

2003

10.8

2004

CAGR: 10%

3.5

1998

3.0

1999

2.5

2000

6.5

2001

7.8

2002

8.2

2003

10.6

2004

Penetration rate of automotive credit/leasing(per cent) Bank deposit (e million)

31363631272726

2003 20041998 1999 2000 2001 2002

2.2

1998

2.8

1999

3.5

2000

4.5

2001 2002

5.5

2003

6.7

2004

8.7CAGR: 26%

1) Published data not consistent with previous years because of changes in underlying accounting – number shownhas been extrapolated based on 2003 figures

2) Based on new accounting

1)

2)

Figure 7.26 Development of Volkswagen Financial ServicesSources: VW financial reports, broker reports, press

These banks provide a complete product and service portfolio. VWFinancial Services sells a large product range including accounts, credit,loans, insurance policies and leasing. The range of products on offer atDaimlerChrysler Bank and BMW Bank is less broad, but covers all ofthe customers’ basic needs. Such retail banking activity has beendeveloped by leveraging partnerships with specialized suppliers. VW,for instance, has signed dozens of contracts with companies includingNeue Leben, HDI, Allianz and SEB Invest for insurance and investmentproducts. VW and BMW have also signed agreements with some of thevery same companies.

The development of OEMs’ retail banking activities has been progressiveand is set to continue across Europe. VW Financial Services, created in 1990,has progressively broadened its scope in Germany by introducing privateaccounts and investment management services. VW wants to expand theseactivities by winning non-VW brand customers, and intends to extend itsfinancial product range to other European countries. DaimlerChrysler Bank,which has expanded the scope of its specialized financial services and citescementing customer relationships as its primary objective, is now planningto extend its activities to other countries. The same expansion objectives alsoapply to BMW when it comes to direct banking.

Is this model unique to Germany? Given the enormous success of thisactivity, could other OEMs apply the model? Is retail banking a growthopportunity, and does it support OEMs in further developing their brandand position? Surely it does, but we also believe that certain character-istics specific to the German banking sector have contributed to thesuccess experienced by German OEMs.

First of all, the banking sector in Germany is highly fragmented,comprising large private banks including Deutsche Bank and DresdnerBank, as well as many local banks and savings banks. The current playersare often relatively weak. Second, automotive distributors already have astrong advisory role. The OES channel, for instance, is the mostdeveloped for insurance products. Third, the awareness of OEMs’ brandsin Germany is extremely high. Strong value is attached when a customerhas a BMW credit card in his pocket because it reveals that he or she ownsa BMW vehicle. A fourth factor is the banking habits of Germancustomers, who tend to hold accounts at more than just one bank. This isnot the case in many other countries including France. A fifth factor is thespecific weight of funds compared with a National Savings Bankpassbook, and the specific usage of checking accounts (Girokonto).

Those characteristics are very specific to Germany and do not neces-sarily exist in the UK, France or Spain. We believe that OEMs in otherEuropean countries would have difficulties employing this sort of model.


Non-captives: the challenge of capturing market share innew growth areasFor non-captives, the major opportunity resides in capturing market sharein new growth areas such as the fleet segment and the used car segment. Anumber of challenges also exist, however. Non-captives would likelyimprove their situation if they leveraged cross-selling potential with theexisting product portfolio and defined target sales channels in line withfuture developments in automotive retailing (multi-brand dealers, largedealer groups, large fleet management companies and so on). Formingpartnerships with the captive financial services providers of importers ormanufacturers in unexplored markets, and expanding regionally incurrently immature automotive financing markets such as CEE, may helpnon-captives capture market share.

OEMs: the captive business model challenge

OEMs are obviously the only players to master all business modelsdescribed above: new car sales, used car buy-back and resale, car repairand maintenance, spare parts wholesale, and financial services. OEMs arealso the first player encountered by the final customer, and while loyalty tothe dealer network may differ from one country to another, it is generallyhigh. According to the analysis below, customer loyalty does not dependsolely on the age of the vehicle, it also depends on where the customer haspurchased the car and whether it is a new or a used car. For a used carpurchased at the dealer, the loyalty to the dealer is still high even if the caris already old. This curve is extremely important for OEMs, and is a keyindicator to monitor the retention of their customer base (Figure 7.27).


Used cars bought elsewhere

New cars + used cars boughtin the OEM's network

89

66

5140

40

121724

1 year 4 years 7 years 10 years Car age

Figure 7.27 Customer loyalty to dealers for service (per cent)Source: Roland Berger Strategy Consultants

OEMs face threats on many fronts. Eurodesign and the impact of BER,consolidation of dealer groups and IAM wholesalers, the increasing pene-tration of adaptable parts, the growing influence of insurers, and thenumber of ageing cars in use are just a few of the threats. But OEMs havethe upper hand when it comes to technology; they also own original partsand specifications, are able to monitor the used car buy-back process, andhave firm control over financial credit.

All the same, the key success factor for OEMs is to develop an evenmore integrated business model, leveraging their ‘bundling’ compet-itive advantage across several dimensions. The first step could be toleverage trade-offs between new and used cars by further monitoringcar flows and the buy-back process through maximizing their Europeanscale. In a second step, the trade-offs between captive and competitivespare parts wholesale could be optimized by further expandingwholesale activities, better controlling spare parts flows, and by opti-mizing pricing and logistics. A third step could involve improvingrepair and service control. This could be achieved by further consoli-dating their own repairer and body shop networks, and by maintainingcompetitive advantage and entry barriers in diagnosis capability.Further development of the customer experience and service qualitycould also be achieved at this stage. In a fourth step, OEMs could try todevelop captive financial services beyond new cars at the point of salethrough leveraging bundled offers and proposing creative solutions tothe customer to beat the competition. A fifth step could involve devel-oping strategies to retain the final customer in the OES channel, bybundling warranty extensions, mobility services, roadside assistanceand other services.

Facing those challenges will also require adapting the distributionorganization. This must be done at several levels. Many sales andmarketing processes could be managed on an even more Europeanbasis, especially with respect to used and new car pricing andmarketing. An increased level of integration will be required to bettercontrol the distribution, implying the reduction of independent nationalsales companies, or to develop more entrenched alliances and toincrease the weight of affiliates. Distribution costs can be further opti-mized by adapting the traditional country organization into leanerstructures, especially to cope with small countries within the newlyformed EU-25. In this context, leaner structures could mean clusteringbusiness into regions with shared activities at the regional level. Manyactivities, from call centres to HR payroll processes, can also beoutsourced.


CONCLUSION: WHICH PLAYERS WILL MANAGE TO CAPTURE VALUE ALONG

THE CAR LIFECYCLE?

The automotive sales and after-sales landscape will continue to evolveover the next few years. Market players will have to adapt their businessmodels to survive in this new environment. New threats will develop, butautomotive market participants will also gain opportunities to captureadditional value throughout the car lifecycle.

Despite the strong acceleration over the past five to eight years, the paceof evolution in this sector is rather slow. This is a result of industry frag-mentation, the evolution of the car market (a model lifecycle is between10 and 15 years!), and the regulation spread. Another factor contributingto the slow pace of evolution is specific to Europe. No single market inEurope is completely identical to another owing to different regulatoryenvironments, different car market profiles, different types of players anddifferent customers’ habits.

Projecting the winners and losers that will emerge in 10 to 15 years time isdifficult given the complexity of the different markets and drivers.Irrespective of the market, one key strategic issue is how the relationshipbetween captive and non-captive players will pan out. Despite the difficulty ofprojecting winners and losers in the near future, we have sketched out threepotential scenarios for 2015 to 2025 to illustrate how the sector could develop.

Although the sketched scenarios are perhaps a little exaggerated, theyare based on our trend analysis. We have also taken into account thecontrasting situation that already exists between European countries today,for example between the UK and Germany, and Spain or Italy and France.

Let’s assume we are in 2020.

The ‘fully captive’ scenario

Given the new technologies that have been introduced over the past 10 to20 years such as X-by-wire or multiplexing, cars have become so complexand repairs so specific that it is near-impossible to have them repairedanywhere else but at the OEM. Car maintenance these days has more to dowith providing updates for the different software inside the car than withchanging tyres. As a consequence, multi-brand repairers have eithervanished or are restricted to repairing very old vehicles. Only OEMs havethe ability to maintain and repair new cars.


Remote maintenance tools and assistance warnings that oblige thecustomer to bring the vehicle back to where it was purchased also directlybind the vehicle and the place of purchase. A similar situation exists in theused car market. Used car customers are offered such attractive financialservices and insurance conditions as well as other services that theybecome tied to the place of purchase. The IAM has shrunk because carscannot be repaired there, suppliers – unable to sell many parts in thismarket – are firmly locked in by OEMs, and easy-to-fit parts such as somespark plugs, wipers and tyres are sold by retail store chains. OEMs arevertically integrated, with subsidiaries in most critical geographical areas.They have developed fleet management services, either internally or viapartnerships, to offer LTD solutions to private companies.

The ‘fully non-captive’ scenario

Cars have become too expensive to purchase, too expensive to repair, toopolluting, and not safe enough, according to the European Commission.Various major independent players and ‘specialized prescriber groups’ areincreasingly defining the rules of the market owing to their influence oncustomer choice. Customers are more frequently choosing vehicles basedon ratings from specialized agencies and institutions. These favour certaincriteria such as fuel consumption, safety, quality, ergonomics, contri-bution to sustainable development, buy-back value, total maintenancecost, and body shape selection flexibility. These specialized agencies haveeven developed their own official label.

The sales channel is driven by various non-captive and independentplayers such as banks, financial institutions, insurance firms and fleetmanagement companies, all of which offer their customers bundled solu-tions. For instance favourable credit is offered for real estate investments,which is bundled with the LTD rental of a fully-serviced family car, and afull insurance package covering both vehicle and house is thrown into thedeal as well. The package also enables customers to change their carmodel throughout the year, when it suits their needs. The customer candrive, for instance, a monospace vehicle over the weekend, a 4-wheeldrive on vacation, and a coupe for work. The customer can choose notonly between different types of vehicle but also between different brands.

These independent players have partnered with selected, referencedfleet management companies with whom they have negotiated specificrates for new and used cars. Repair and maintenance is fully managed bythe independent company, which provides such services as roadside assis-tance, pick up, and repair at referenced repairers. The end-user does not


know what parts have been replaced in the car because everything iscovered in the contract. OE parts, matching quality parts, adaptable orreused parts are not visible to the end-user. Customers simply purchase acompletely tailored contract providing full mobility service.

The ‘retail’ scenario

Distribution is controlled by powerful automotive distribution groups thatnot only sell cars but also provide all related services, including financialservices, leasing and LTD. These players were once dependent on OEMs,but their size and multi-make contracts have granted them greater inde-pendence over the past years. Automotive distribution groups are alsodeeply involved in wholesale and repair activities, made possible throughtheir own pan-European structure. Some have even developed a globalstructure. This situation arose following mergers between large multi-makedealer groups and previous IAM wholesalers and repair networks. It wasalso spurred along by organic growth in emerging countries such as Chinaand India, and by alliances with distributors in the United States and Japan.

The distinction that once existed between the captive OES channel andthe non-captive IAM channel is no longer in place. Automotive distri-bution groups are capturing customers and are in charge of definingsourcing policy for new cars, used cars, spare parts and financial servicesproviders. They are starting to impose product and service specifications(car range, options and specific equipment) and are even selling cars andservices under their own brand. Spare parts are sourced from anassortment of offers from their global footprint based on the best cost andrebates. Distribution groups also offer their customers innovative solu-tions such as multi-brand showrooms, one month’s car trial, and bundledservices. The market is divided between producers, OEMs, suppliers anddistributors in a retail logic set-up.

Striking the balance

The future will likely contain elements of all three scenarios. Germany isthe European country that already most closely fits the captive scenario,while the non-captive scenario can best be seen in the UK, and the retailscenario is best demonstrated in France. The balance that is struckbetween the players will be the determining factor in any scenario thatdevelops. That balance will not be easy to find, since the bargainingpower of many players is almost equal and a mutual dependency


connects them. The equilibrium reached in each European market willdepend on various factors.

One important factor is the country and market structure within anyparticular country. What will be critical in this context is the level ofconcentration among the different players, whether it is the OEM’s homemarket, how integrated the banking and insurance system is, and howdeveloped the OEM’s brand equity is.

A second important factor is the maturity of the market. Whether themarket is emerging or is already mature is a key question in this context.The maturity of the market also takes into account such factors as thetransformation of the pool of cars and changing consumer habits.

Customer groups are also a factor that will affect the relationshipbetween the players. Here a balance needs to be reached between thepremium versus the volume segment, family versus youth, and even urbanversus rural. The specific strategy taken by individual players, includingbrand and international development, will also be a critical factor.

The winners of this battle for value will likely be the players with themost financial power, the closest relationships with customers, andthose that can best bundle opportunities. Independently financed playerswith only one business activity, brand and geographic area will lose thisbattle. To a large degree, the winners in terms of capturing value alongthe automotive lifecycle are already visible. It is easy to imagine anautomotive landscape composed of four types of players: OEMs, largedistribution groups, financial and insurance groups, and large profes-sional customer groups.

Yet the mutual dependency between these players will become toostrong to allow any one player to dominate the others along the valuechain, as we depicted in each of the three scenarios. This powerful mutualdependency between the players with strong bargaining power will createthe need for alliances or partnership structures. Based on predefinedstrategies, these partnership structures will be developed to address aspecific market or customer segment.

In the premium car segment in emerging countries, for instance, astrategy that could be taken by an OEM would be to maximize verticalintegration (as depicted in the captive scenario) but to simultaneouslydevelop alliances with large fleet groups and financial companies. Avolume OEM not operating in its home market could favour a strategy thatinvolves partnering with key distribution groups and the development of adifferentiated offer to compete with incumbent players (as we sketchedout in the retail scenario).

The objective pursued will always be the same: to offer increasinglybroad but tailored mobility solutions to the end-customer at lower and


lower total cost. The automotive distribution value chain in Europe is farfrom optimum. Significant improvements can be made. Like other industryexperts, we believe that 30 per cent of distribution costs could be elimi-nated or replaced by providing more added value to the final customer.


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Part II

Case studies

217

218


8

Partnership as a model for success

Franz Fehrenbach, Chairman, Robert Bosch GmbH

This chapter considers cooperation between automobile manufacturersand their suppliers.

INTRODUCTORY REMARKS

In the course of many decades, German and European automobile manu-facturers and their suppliers have worked hard to achieve their leadingposition in the world. A key factor in this success is the tradition of closecooperation, which has proven its worth and is just as valuable today as ithas always been. This partnership was and is the prerequisite for the state-of-the-art technology with which the German car industry has made aname for itself across the globe. However, manufacturers and suppliersmust now come to grips with profound changes of various kinds.

One of the main drivers behind these changes is the shifting of weightsin the global automotive market. Asia continues to gain momentum as theworld’s most dynamic growth region. On the one hand, the emergingmarkets of Asia present enormous sales opportunities; on the other, inter-national competition is becoming increasingly stiff. New contenders arecoming of age in China and in India. Their goal is to establish themselvesas major players, not only domestically, but also in international markets.

In addition, new market segments are developing: in the emergingmarkets of Asia and Eastern Europe, the demand for economy cars is

219

growing. Despite their low price, these vehicles must comply with keyconsumption and emission standards, since the need to conserve resourcesand protect the climate is also growing, and this on a global scale. Suchcars are also attracting the interest of buyers in established markets. If itwants to participate in global growth, then it is especially the Germanautomobile industry, with its strong focus on advanced technology, thatmust find appropriate responses to these changes.

The sharp upswing in the price of oil poses a further challenge, and hasrekindled the debate about future drive systems. If the automobile is toremain the favoured means of transportation, the car industry must find asuitable response to this debate. Moreover, with more and more cars onthe road worldwide and with an increasing density of traffic, heighteneddemands will also be placed on safety.

At the same time, the automotive sector is marked by growingcomplexity. One reason for this is the growing diversity of models;another is the industry’s increasing international spread. Among otherthings, this is leading to a change in the way automotive partners co-operate. Suppliers are assuming more and more tasks in development andproduction, tasks involving entire vehicle systems.

These numerous changes raise some important questions. Is the idea ofpartnership viable under these new conditions? What form will coopera-tion between automobile manufacturers and suppliers take in the future?What factors will be most important for successful cooperation betweenpartners down the line?

THE EXAMPLE OF ESP: THE STORY OF ASUCCESSFUL PARTNERSHIP

When considering how partnerships can function successfully in the auto-motive industry and what factors come into play, one example that readilysprings to mind is the development of ESP. Technologically, ESP wasbased on ABS, also developed as a joint effort between today’sDaimlerChrysler AG and the Bosch Group. When it came to further devel-oping the ABS system, the two companies initially took separate paths.The challenge they shared was to stabilize the vehicle against lateralforces; stabilizing it in a longitudinal direction was no longer enough. ABosch engineer came up with the idea of a lateral slip control utilizing twolateral-acceleration sensors. At the same time, Bosch was in the process ofdeveloping a more economical single-channel ABS, which in the end

220 Case studies

proved not to be viable. The need for an additional sensor, a yaw-ratesensor, became apparent. Consequently, a decision was reached todevelop a vehicle dynamics control system based on high-quality four-way hydraulics. In winter trials, engineers from Bosch andDaimlerChrysler demonstrated their differing solutions to each other. Allinvolved agreed to cooperate even more closely in the future, and to usethe concept developed by Bosch as the basis for continuing the project.

This marked the start of a joint project. Both sides established projectorganizations, each comprising nine teams of experts in the relevant disci-plines: sensor technology, hydraulics, control unit engineering, controllerand software application, measuring and test engineering, simulation, aswell as purchasing and sales. The advantage of this mirror-imageapproach was that each of the specialists could contact his or her counter-part at the other company directly, without resorting to time-consumingofficial channels. In software development, where especially close co-operation was required, a core team of experts from both companies wasassembled and assigned its own project facilities. This organizationalstructure alone meant that development took a good year less than origi-nally planned. As a result, ESP was ready for its market launch as early asthe mid-1990s.

Many obstacles along the way

The path to ESP was strewn with numerous technological challenges,notably in the area of software. For example, testing revealed that theinitial prototypes were unable to distinguish between cornering on asteeply banked surface and spinning out on ice, since both situationsinvolve only minimal lateral acceleration forces. Consequently, algo-rithms had to be developed to identify both the traction properties of theroad surface and the banking angle of the vehicle. Such detailed workrequires not only intensive communication with the customer, but also awillingness by both parties to carry out projects with uncompromisingcommitment. It also requires the ability to endure setbacks.

One key task was to adapt the yaw-rate sensor, the heart of the ESPsystem, to the requirements of the automobile. This kind of sensor wasdeveloped for space travel. In a rocket, such a sensor must function underextreme conditions, though here it is generally designed for one flightonly. In an automotive application, on the other hand, it is expected toremain intact throughout the entire service life of the vehicle. But the taskwas not only one of developing the sensor itself. If the system was toachieve success in all segments of the market, then a solution had to be

Partnership as a model for success 221

found that was suitable for large-scale series production and thus cost-effective. And today, a sensor that once required a bulky housing iscontained in a micromechanical chip no larger than a fingernail. It is alsonow available for a hundredth of its original cost.

What can be learnt from the example of ESP

ESP has been a success story for years now. The legendary ‘elk test’ trig-gered a major surge in demand. At the time, Bosch managed to ramp uplarge-scale series production of ESP for the Mercedes A class within just afew weeks. This would have been impossible without the teamwork andcoordinated project work with the manufacturer that had become routineduring the development phase.

By the end of 2005, Bosch had delivered more than 15 million systems.Almost three-quarters of new cars currently sold in Germany areequipped with ESP; the total figure for Western Europe is 40 per cent. Allmanufacturers here support initiatives like the EU e-Safety programme,which aims to halve the number of road deaths by 2010. This requiresthat an increasing percentage of cars and trucks be equipped with ESP.This percentage will also grow in the United States, as independentstudies have confirmed that the significant safety benefits of ESP applyequally to American road traffic.

This example of the joint development of ESP touches on virtually allthe factors that make for successful cooperation and partnership betweencar makers and suppliers. These include:

� the independence and responsibility of both parties;� the common goal of technological leadership;� cost-effective structures and processes;� international cooperation;� a shared long-term perspective.

222 Case studies

FACTORS IN PARTNERSHIP

The first factor in partnership: independence andresponsibility

In the automotive industry, a key international sector, major successeshave many sources. One of the main reasons for the technological lead-ership of the German and European automotive industry is undoubtedlythe close cooperation of car manufacturers with independent suppliersacting on their own responsibility. Close cooperation is characterized bycommon goals: both partners work to achieve overriding commonobjectives to their mutual benefit. Manufacturers and suppliers seethemselves in many respects as being in the same boat, but especiallywhen it comes to ensuring that the automobile remains appealing toconsumers on a long-term basis, while at the same time remaininggeared to changing demands on environmental compatibility, safety andeconomy.

Entrepreneurial independence and responsibility means that each partyinvolved is responsible for its own business success, and therefore retainsthe authority to decide whether or not to enter into contractual relation-ships. The other side of the coin is, of course, loyalty to the terms of acontract, which leads to a complex web of economic interdependencies.In this regard, business always involves a system of dependencies.However, this system must be designed for the benefit of all concerned. Aone-sided advantage is generally possible for the short term only, and eventhen it poses a threat to the long-term success of the parties involved,including the supposed ‘winner’.

The independence that allows companies to enter into contractual rela-tionships brings with it all the fundamental advantages of the division oflabour. Each partner company specializes in its strengths, concentrating itscompetence on the further development of those areas in which its special-ization holds particular advantages. And since both sides must alsocompete in the marketplace, both feel the pressure to drive innovation andefficiency with great creativity, as well as to adapt flexibly and consistentlyto changing requirements. Based on this proven division of labour, theideas and developments of suppliers contribute significantly to techno-logical progress throughout the entire sector. At the same time, they mustmake every effort to produce systems and components as cost-effectivelyas possible. And in cooperation with manufacturers, they must ensure thatthe various systems in a vehicle are perfectly compatible with each other.


Inequality of powerThe independence of suppliers results in tangible benefits for allconcerned, yet working relationships often suffer when there is a disparityin power between the partners. The fact is that concentration has sharplyincreased in the industry. Automobile manufacturers have grown intoworldwide conglomerates that consistently utilize their strong positions,especially when it comes to purchasing. In principle, what serves to checkthis increase in manufacturers’ market power is the proportion of valueadded contributed to the automobile by suppliers in general, which hasnow grown to between 60 and 70 per cent. To counter this, manufacturerspursue a strategy of breaking down systems into components, to enablethem to purchase interchangeable parts at lower prices.

Purchasing prices are not all that is under pressure today. There is agrowing trend towards transferring a greater share of quality risks and theassociated guarantee costs to suppliers, often in full awareness of the riskof adversely affecting their capacity for innovation. Especially for smalland medium-size suppliers, an individual order can be critical to thesurvival of the entire company. For this reason, they are extremely limitedin their freedom to say ‘no’, and often agree to accept risks that carry withthem a potential threat to their very existence. Appealing here to themanufacturer’s sense of fairness may be an honest approach, but in lightof today’s gruelling competition on all sides, it holds little promise ofsuccess. The consequences are only logical: shake-out and increasingconcentration also in the supplier camp.

Competence and a broad footing support independenceHaving the strength to maintain an independent position means that asupplier must have a strong and reliable capacity for innovation, qualityand cost-effectiveness. Also of key importance is the ability to draw on abroad portfolio of customers and products, as well as to utilize a globalpresence. Ever since Bosch was founded, it has been working systemati-cally to fulfil these requirements. The company has gone even further byentering into markets beyond the area of automotive technology, withgood business success.

Bosch has achieved presentable results with this strategic orientation:sustainable, positive growth over the course of many decades, coupledwith a stable financial position. This in turn puts Bosch in a position tomake major up-front investments in new technologies, while offering itscustomers long-term, stable cooperation that is successful for both sides.

Our observation is that this approach of achieving and consistentlydefending a position of independence is in the best interests of the entire

224 Case studies

automotive industry, an observation which is clearly borne out by themany negative examples of other companies that had for a long timepursued a different approach. This is especially apparent today in NorthAmerica, where domestic manufacturers and suppliers alike are strug-gling with major economic problems. In the cultural contexts of Japan andSouth Korea, there has long been a tradition of close ties between manu-facturers and suppliers, even to the point of cross-investments andholdings. Such a relationship affords the supplier comparatively littledecisional autonomy. For the most part, responsibility for technologicaldevelopment here is also in the hands of the manufacturer, with supplierstaking on a largely in-house role.

But here too the situation is beginning to change, as the automotiveindustry can no longer take part in the global market on the basis of exportactivities alone. The impetus to change is coming from both sides: frommanufacturers, who cannot simply take their suppliers with them whenexpanding into other regions, and from suppliers, who either seek co-operation with leading international systems suppliers with specificknow-how or wish to establish a worldwide customer base themselves.Generally speaking, Bosch has already achieved what these companiesare working towards: independence based on competence and a broadinternational footprint.

The second factor in partnership: the common goal oftechnological leadership

The purpose of a partnership is to bring each party’s specific skills andcapacities to bear on common challenges and goals. If the European andGerman automotive industry is to prevail in global competition, manufac-turers and suppliers alike will have to master three main tasks: to maintaintechnological leadership by means of innovation, continue to improvequality standards, and offer products at competitive prices.

Especially over the past 10 years, a wide range of innovations haveplayed a crucial role in the success of the European and German auto-motive sector. These advances have helped boost vehicles’ performancedramatically, in terms of fuel consumption and emissions as well as interms of safety, comfort, and driver support.

Bosch has also participated in this positive development, even thoughexpanded activities outside Europe have accounted for a major portion ofthe substantial sales growth recorded in its automotive technology businesssector, a growth in sales from 10.5 billion euros in 1995 to some 26 billioneuros in 2005. The greatest contribution Bosch has made to the innovation


drive over the past 10 years is to be found in the development of ABS andESP, in direct-injection systems for diesel and gasoline engines, and in navi-gation and driver assistance systems. To achieve this, the Bosch Group hascontinuously increased its research and development expenditures in itsautomotive technology sector over the same period. Today, these expendi-tures represent more than 9 per cent of sales in this sector, considerablyabove the industry average.

Suppliers assume more and more responsibilitiesSuch exceptionally high research and development expenditures of Boschand other automotive suppliers clearly reflect the fact that suppliers aretaking on a growing share of vehicle development tasks. The trend amongcar makers is to concentrate more on overall vehicle architecture, specificmodel features and design, as well as on assembly, marketing and service,in order to prevail in today’s globally merging markets.

In this context, suppliers are playing an ever more important role indriving innovations, becoming more active in the development andproduction of systems and special components. In the end, this is alsoabsolutely necessary to ensure that innovations remain economicallyviable. Provided suppliers are independent and work with differentcustomers, they can stay in a position to manufacture in the largeproduction runs required to amortize their high R&D costs. Ultimately, itwas this ability that allowed Bosch to carry out such developments as ESPand high-pressure diesel injection.

Forward-looking cooperation: AUTOSAR

Future developments in automotive technology will be driven by elec-tronics even more than has been the case up to now. The share of elec-tronics in vehicles will thus continue to rise in the years to come. Yetelectronics, alongside the greater diversity of models and variants, today’ssignificantly shorter model cycles, and the enormous range of sub-systems used, is a major driver of complexity and cost. Generating viablesolutions for the future under these circumstances places exceptionallyhigh demands on partnerships between manufacturers and suppliers.

In 2003 Bosch was one of the founding members of the industryalliance AUTOSAR, together with other German suppliers and manufac-turers. This acronym stands for ‘Automotive Open Systems Architecture’,and accordingly the partnership is dedicated to developing a concept for acommon, standardized electrics/electronics architecture. The concept is to

226 Case studies

be introduced to the market as a way of replacing a number of conven-tional company-specific solutions. Nearly all major manufacturers andsuppliers worldwide have now joined the initiative. AUTOSAR is thus notonly an example of how partnership allows growing systems complexityto be brought financially under control to the benefit of all involved; italso takes account of the increasing levels of global interdependence. Theinitiative gives each partner the freedom to differentiate in order to securea competitive advantage. At the same time, it will be possible to developuniform basic software functions which have no immediate bearing oncompetitive position.

The common goal of qualityAlong with reducing the development costs of electronic systems, a keyobjective of AUTOSAR is to master the complexity of such systems,which results from the proliferation of control units in the car. Many carstoday have as many as 70 control units. For the future, it is planned thata network of some 20 control units will regulate all vehicle functions.This complexity is by no means arbitrary, but for the most part thelogical consequence of current demands with respect to emissions andfuel consumption, as well as safety and comfort. However, malfunctionsas a result of complexity have given rise to a new quality debate amongcustomers. Breakdown statistics in recent years have shown that qualityleadership no longer resides with German premium car makes. Onoccasion, manufacturers and suppliers have even publicly blamed oneanother for quality deficits. Such a debate is damaging to the entireindustry, regardless of where responsibility for the shortcomings maylie. The situation has now improved considerably, and statistics reflectinitial positive trends. And German cars are regaining lost ground inquality rankings.

An important milestone was reached on 22 June 2005: the agreement‘Quality, the Foundation for Joint Success’ between manufacturers andsuppliers on the managing board of the German Association of theAutomotive Industry (VDA), an agreement which also regulates commu-nications. The focus of this agreement is on partnerships between manu-facturers and suppliers, not only in terms of external communications, butalso in terms of sharing knowledge and taking rapid, coordinated actionwhen the necessity arises.

Partnership is built on trust and transparency. Trust means that criticaland difficult issues as well as outright bad news are discussed openly andwithout delay. Problems are solved by working together. This applies toall corporate levels, internal as well as external. As a systems supplier,


Bosch must act as both transmitter and receiver of such information incommunications with its customers and suppliers.

Transparency means that each partner must be aware of the otherpartner’s current projects, what modifications are planned, and how theproducts will later be deployed, even if a system or component is to bedeployed in a model not originally planned. However, should this benefita product, partnership also means adopting quality tools that have beenused successfully by a partner. For instance, Bosch has adopted a numberof quality tools from Toyota.

In the future, Bosch will review its own processes and those of itssuppliers more intensively than ever before for ways of optimizingquality. As tier 1 automotive suppliers become fewer in number, we havea greater responsibility for tracking the high-quality demands of carmakers throughout the entire supply chain. In doing so, it will be essentialfor us to extend the spirit of partnership to include every supply level.

Innovative products for new market segmentsThe German automobile industry has experienced most of its internationalsuccess over the last 10 years with premium vehicles. In many areas,German suppliers have stood for high-tech systems and products. In the10 years to come, however, the most significant growth can be expectedwith cars selling for under 10,000 euros net, or even less than 7,000 eurosnet in some cases. And this applies not only to emerging markets in Asia,but to Eastern Europe as well. New responses are called for.

These markets are demanding low-cost vehicles that can still meetminimum standards with respect to fuel consumption, emissions andsafety. For example, for the meantime the Euro 3 emissions standard fordiesel engines applies to Beijing and Shanghai. Only with modern elec-tronic injection systems is compliance with this standard possible. At thesame time, new local manufacturers are maturing in emerging marketssuch as India and China. These new contenders have set their sights onprecisely this target group, and are also looking to succeed worldwidewith such cars. But it is not only German suppliers who need to answer theall-important question, whether they are able to deliver the right productsin order to do business with these new manufacturers. It would help if bothGerman manufacturers and suppliers were to work together on techno-logical solutions to exploit these market opportunities.

Shared market interestsOne example of shared market interests, which more than anythingbrought Bosch and manufacturers closer together, resulted from the debate

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on particulate matter in 2005. In Germany, the controversy was focusedalmost exclusively on diesel engines. With its undisputed benefits for fuelconsumption and climate protection, diesel technology has significantlystrengthened the competitive position of the European and German auto-motive industry in recent years. Germany has profited considerably as abusiness and industry location. In 2005, roughly half of all new passengervehicles sold in Europe were equipped with diesel engines.

A heated debate threatened to end this success story, particularly inGermany, after a strict EU directive on particulate matter came into effectin early 2005. It remains undisputed that diesel emissions from localpassenger vehicle traffic constitute as little as 3 per cent of particulate-matter pollution in our cities. Yet the German public perceived dieselengines as the sole culprit, even though the image of diesel-powered carsas sluggish polluters should be a thing of the past. Diesel engines havebecome not only more fuel-efficient and agile, but also significantlycleaner: internal engine improvements alone have reduced particulateemissions by a good 90 per cent since 1990.

The Euro 5 standard, planned for 2010, foresees particulate emissionlevels close to zero for new cars. In addition, early replacement of oldervehicles would further reduce these emissions by almost 20 per cent infive years, and this applies to all diesel-powered passenger cars on theroad. Not least thanks to a persistent information campaign by the auto-motive industry, more objectivity was brought to the debate. This is alsonecessary if the diesel is to exploit its potential beyond Europe.

The ‘globalization of diesel’ is in the interest of the entire Europeanautomotive industry. It has a technological advantage in this area which itshould utilize on a global scale. Diesel acceptance in North America iscrucial, and accomplishing this will require a joint marketing strategy forthe European automotive industry. Bosch has already made a large-scalecommitment, with measures including ‘Diesel Days’and a test-drive fleet.Initial success can be seen: approximately two out of every three drivers inthe United States plan to at least consider a diesel when buying a new car.Were its proportion of diesel-powered light utility vehicles at theEuropean level today, the United States would be largely independent ofoil imports.

In 2005, the US Congress agreed on measures to promote fuel-efficientvehicles. Fortunately, this applies to diesel-powered cars as well as hybridmodels. The addition of the particle filter further improves the chances for‘dieselization’ on the other side of the Atlantic. Bosch is also working oncontrol concepts and metering systems aimed at reducing nitrous oxidesto comply with US07 limits in all states. Development projects involvingAmerican and European manufacturers are in progress.


A further challenge for the European automotive industry is the simulta-neous development of hybrid solutions. Hybrid drive concepts are mainlysuitable for stop-and-go traffic, and thus offer most of their benefits inurban areas. Accordingly, the market share of hybrid passenger cars andlight utility vehicles in Japan could reach 10 per cent by 2015. Moremodest changes are predicted in the American market, despite notableinitial successes scored mainly by Toyota. The United States is a nation oflong distances, heavy cars and powerful engines. This situation cries outfor partnerships between manufacturers and suppliers, partnerships thatwill allow them to shoulder the costs of developing this technologytogether. Bosch is working intensively on various hybrid concepts, andhas established a ‘Competence Centre for Hybrid Systems’ dedicated tothis purpose.

The third factor in partnership: cost-effective structuresand processes

Structures and processes in the automotive sector must reflect thechanging demands of the market. Along with technological leadership,this is a fundamental prerequisite for the future joint success of manufac-turers and suppliers. As already mentioned, an ever larger proportion ofvalue added is being shifted from manufacturers to suppliers. The asso-ciated changes in the division of labour necessitate further structuraladjustments in the cooperation between manufacturers and suppliers, asdo abbreviated product lifecycles and expanding product variant ranges.Moreover, the growing number of production sites maintained by manu-facturers and suppliers at locations all around the world results inheightened demands on all business processes.

These challenges cannot be mastered by individual companies alone, norcan they be mastered through individual measures. The entire value addedchain, beginning with the product-creation process, must be looked at.Here, more than at any other stage, close cooperation in the spirit of part-nership is required. In a very early phase of product development, engi-neers must begin to work in a close-knit network. This is the only way toavoid unfortunate product design constellations that result in unnecessaryadditional costs or even quality risks for the manufacturer or supplier.

It is not only in development, however, that customer and supplier mustclosely coordinate their processes at an early stage. A logistics conceptmust be defined almost equally early on. The same goes for a quality andinspection concept for the supplier’s products. The goal must always be tooptimize the competitive position of both partners by avoiding the waste

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of resources in any form, while at the same time developing reliablemanufacturing methods that allow inspection processes to be minimizedat the end of the assembly line. This applies to the entire supply chain.

Geographical proximity remains importantThe proximity of manufacturers and suppliers is becoming increasinglyimportant for the application stage. While new communications tech-nology renders face-to-face meetings unnecessary in some cases duringthe design and development phase, it is essential that engineers and tech-nicians are able to practically get behind the wheel together during appli-cation. In order to provide this hands-on service to customers in as manycountries as possible, Bosch is significantly expanding the number of itsapplication centres worldwide.

Once a component or system has gone into production, fast andeffective communications between supplier and manufacturer become atop priority. Both parties must be in a position to take rapid and decisiveaction in the event of a critical situation, be it a supply bottleneck or aquality-related incident. This was illustrated by the example of dieselpumps in early 2005: during production, ongoing endurance testsconducted by Bosch indicated that a number of pumps failed to performfor the length of the defined service life. Bosch swiftly relayed thisunpleasant and unwelcome finding to the automobile manufacturersaffected, and it was possible to halt delivery of vehicles with potentiallydefective pumps to buyers. Furthermore, in cooperation with the manu-facturers’ materials specialists, expert teams from Bosch were able toisolate and evaluate the defect, and reach a decision together with theirpartners on measures to correct it. The incident gave rise to a newdiscussion on partnership in quality issues at the VDA, with fruitfulresults. As mentioned above, the entire VDA managing board signed theaccord ‘Quality, the Foundation for Joint Success’.

Balancing innovation and cost leadershipThroughout the value added chain, each company in our sector is relianton the cost-effectiveness of its partners. First and foremost, however,each is of course responsible for optimizing the cost-effectiveness of itsown operations.

As the world’s largest automotive supplier, Bosch faces the twofoldchallenge of maintaining its leadership in technological development whileat the same time offering its products at competitive prices. Which of thesechallenges outweighs the other depends on the maturity and age of a givenproduct. Bosch will continue to introduce pioneering developments such as


ABS, ESP and high-pressure diesel injection in order to set itself apart fromthe price competition. Yet it has become increasingly difficult to retain atechnological edge for any length of time, with the result that innovationsmust now face stiff cost competition soon after they are launched. At thatpoint, if not earlier, it becomes crucial to optimize processes for cost-effec-tiveness and to consider alternative production sites. For this reason, some50 per cent of our R&D expenditures today are dedicated to product andprocess innovations whose purpose is to reduce costs. At the same time, aworldwide production network that includes low-cost sites in emergingmarkets must be established at an early stage, even for high-tech products.In the case of the highly innovative common-rail diesel-injection system,nearly two-thirds of its value added is already created outside Germany. Inthis way, Bosch not only meets the demand of producing locally within itsmarkets, but also reduces total manufacturing costs.

To realize the maximum earnings potential in a given area of business,it is essential to recognize at an early stage the point at which the competi-tive advantage of technological differentiation is superseded by price.Business in systems is typically displaced by business in components as atechnology matures. Today, classic gasoline-injection technology is rarelydelivered as a complete system. However, it is considerably more difficultto achieve technological differentiation with individual components, suchas injection valves or fuel pumps, than with complete systems. In thiscase, the focus is on keeping costs as low as possible, and thus onoptimum processes.

Process optimization is called forThis demands a new, and above all self-critical, approach to processes.Whether they involve development, purchasing, production or sales,many processes on all levels of the value added chain are often still toocomplex and thus too costly. In order to exploit the potential of greaterefficiencies, it is necessary to part with a number of traditional yet oftensuperfluous procedures. For example, in some cases Bosch had takencomplexity a step too far in automating its production. The BoschProduction System, designed after a Japanese model, represents at least apartial return to more straightforward processes and procedures.

A mix of high-cost and low-cost countriesBosch, like other companies, must exploit the value-added potential of theworld’s low-cost regions in order to stay competitive. However, its prin-ciples remain unchanged: for Bosch, there is more to intelligent locationalplanning than cost management. Now, more than ever, skilled leveraging

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of an international development and production network is the key tosuccess. Each region of the triad requires a mix of locations, those offeringspecial cost advantages as well as those that benefit from proximity tomajor customers or research centres. And it is still the case today thatBosch plants in Germany have enormous strengths when it comes to newproduct launches, not least thanks to their experience in handling complexsystems. On the other hand, their competitive position must be ensured byintegrating low-cost locations into the network.

The number of Bosch associates working in automotive technology inGermany has risen to more than 65,000 over the past 10 years. However,the automotive workforce outside Germany has doubled during the sameperiod, growing to more than 90,000. For the future, the question thatarises for us is how these jobs can be retained at today’s locations. And thisapplies not only to Germany, but also to the rest of the world. It is impos-sible to bring about wage parity between industrialized and emergingcountries. In essence, what we are after is an intelligent weighting of alllocational factors in order to create a balance between locations withadvantages in terms of know-how or of political and social stability on theone hand, and locations in emerging countries with especially pronouncedcost advantages on the other. Such weighting cannot be a one-off action,but must be continuously adapted in step with global changes.

The fourth factor in partnership: international presence

A further factor is becoming increasingly important for the success of theindustry, as well as in cooperation between car makers and their suppliers:their international spread. The German automotive sector is now a globalbusiness. This is especially true of Bosch. Some 75 per cent of our sales inautomotive technology are generated outside Germany, including non-German production. Europe, with roughly two-thirds of sales, stillaccounts for the lion’s share. Yet the two other regions in the triad, theAmericas and Asia Pacific, continue to grow in importance. In 2005, theBosch Group had around 110 production sites in 34 countries in auto-motive technology alone.

Internationalization began early at BoschBosch is an international company by tradition. As early as 1898, thecompany’s founder Robert Bosch established his first sales office outsideGermany in London, just 12 years after his ‘Workshop for PrecisionMechanics and Electrical Engineering’opened for business in Stuttgart. In


1913, the last year of peace before the First World War, Bosch generatednearly 90 per cent of its sales abroad. The key product in this early inter-nationalization was the magneto ignition device. It made Bosch an auto-motive supplier and established the company’s global presence, even atthat early stage. Following each of the world wars, however, Bosch had togo though the difficult process of becoming re-established in internationalmarkets. It was especially difficult to regain a foothold in the aftermath ofthe Second World War, as by then the markets were firmly in the hands ofcompetitors. Moreover, unlike at the beginning of the 20th century, Boschwas not in a position to offer a product with the same unique appeal as thehigh-voltage magneto ignition device.

Like other suppliers, Bosch carried out its new internationalizationinitiative in three steps. The company began by supplying originalreplacement parts for exported German cars, including Volkswagen andMercedes, in the United States. The second phase began after German carmakers had established plants in countries such as Brazil, Argentina,Mexico and Australia, as early as the 1950s and 1960s. To supply them,Bosch built its own local production facilities, an especially importantmove, as high import duties coupled with local content regulations wouldhave rendered delivery from German plants impossible. These facilitiescontinue to exist today, although now following the liberalization ofmarkets their main advantage is that they allow Bosch to be close to thecustomer and to utilize generally lower wage costs. In a third phase, Boschsucceeded in winning over non-German car makers as original equipmentcustomers. In the 1990s, important milestones in internationalizationincluded the acquisition of the brake business of the American manufac-turer AlliedSignal and the assumption of industrial leadership at theJapanese supplier Zexel.

Shifting growth regionsGerman manufacturers and suppliers must learn to accept that global-ization of the automotive industry will continue. Most importantly, thestrongest growth will occur in Asia and Eastern Europe in coming years. IfGerman car makers and German suppliers wish to participate in thisgrowth, they must make an even greater commitment to international-ization. This holds in equal measure for the Bosch Group. In the longterm, we aim to increase the proportion of our automotive technologysales in the Americas and Asia from the present level of approximately 36per cent to roughly 50 per cent. It is worth mentioning that international-ization is by no means a one-way street. This is evident in the moves ofJapanese and Korean manufacturers to establish plants in the United

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States and Europe, as well as in the redoubled efforts of American andAsian suppliers to expand their presence in the European market.

Global responses to local requirementsInternational presence is thus a key factor in partnership between manu-facturers and suppliers. It is not just for cost reasons that Bosch hasestablished an international development and manufacturing networkfor its core products. More importantly, a successful supplier must act atleast as globally as its customers. This also means being able to developlocal solutions for specific needs in each country. For VW and GM inBrazil, for example, Bosch has produced a fuel-injection system thatfunctions with sugar cane ethanol in addition to gasoline. Such newideas can only be anticipated and carried through on the basis of a stronglocal presence.

However, local solutions alone are not enough. The first ‘global ABS’,which was introduced to the market in the mid-1990s, represented a mile-stone for Bosch. It was shaped by the needs of Japanese car makers withplants in Asia as well as in Europe, which wanted to be supplied with thesame system at all locations, yet with as much local content as possible. Inother words, the system had to be manufactured regionally or at least onthe same continent. A global ABS was the only solution that would allowthis to be achieved in combination with high production volumes. Only inthis way was it possible to minimize initial costs for development andprocess technology.

Yet this did not necessarily mean that special customer wishes would beneglected. Indeed, standardized key technologies provided the basis formodifications. This approach even shortened release procedures. Once anautomobile manufacturer had approved an ABS component at oneproduction facility, there was no need to carry out another time-consuming analysis on the other side of the globe. If this was to work,there had to be identical manufacturing processes and machine tools at allsites involved, in Germany, the United States and Japan just as in Australiaand South Korea. This coordination encouraged greater flexibility.Despite local content requirements, case to case capacity bottleneckscould be compensated for with deliveries from other plants. Theworldwide manufacturing network was backed up by a worldwide devel-opment network. Accordingly, the design of the hydraulic modulator forthe global ABS emerged from a competition held within the company.American, German and Japanese engineers participated, and the designchosen to be manufactured included ideas from all sides. The process ledto a sustained intensification of cooperation on a global scale.


Bosch has a broad international footprintToday, Bosch operates more than 50 engineering and application centresaround the world. One out of three R&D associates works outsideGermany. Of these associates, some 2,000 are located in the Americas,and roughly a further 2,000 in Asia. In Japan alone, Bosch employs nearly1,000 automotive engineers. Development capacities have been concen-trated there for good reason: automobile production may be growing onlymodestly within Japan itself, yet as far as technical concepts for interna-tional business are concerned, Japanese manufacturers continue to reachimportant decisions in Japan.

The capacity to adapt locally to the individual needs of each manufac-turer is therefore critically important if automotive suppliers are to besuccessful globally. Accordingly, it was no coincidence that in 2004Bosch decided to establish a new engineering centre with 2,000 engineersin Abstatt, near Heilbronn in south-west Germany. A supplier wishing topresent itself and its know-how to the world side by side with Germanmanufacturers must be near the car makers’ development centres. At thesame time, Bosch set up further engineering centres in the Chinese citiesof Suzhou and Wuxi. Again, our software development centre inBangalore, India, provides valuable support for all our automotive tech-nology divisions. For example, the Bosch subsidiary Blaupunkt alsoutilizes the know-how of Indian software specialists in the developmentof its navigation systems.

The fifth factor in partnership: a long-term perspective

The increasingly complex and international structures of the global auto-motive industry are not the only factors influencing cooperation betweenmanufacturers and suppliers. Not only the hard, but also the ostensiblysoft factors play a role. Along with independence, these include a long-term perspective.

In these hectic times of quarterly reporting, dictated by the financemarkets, there is no denying that the ownership structure of Bosch, with acharitable foundation as its principal shareholder, makes it easier to takesuch a long-term perspective. Bosch is in a position to commit itself tomajor up-front investments over the long term without having to justifythe short-term financial consequences to the outside world. Especially forfundamental innovations, perseverance is an asset.

The example of ESP demonstrates the extent to which the developmentof electronic systems can become an obstacle course. Again and again, the

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path to success in innovation is fraught with difficulty, and can also belong and hard. Even the development of ABS was certainly on the brink offailure more than once. During the first winter trial of ABS in 1972, nearlyone in three control units broke down under gruelling conditions. Theelectronic systems were prone to failure because they were made up ofover a thousand analogue components. When today’s DaimlerChryslerAG and Bosch introduced ABS to the market in the Mercedes S class inthe summer of 1978, this marked the first application of a digital LSIcircuit in a series-produced car: the breakthrough that put electronics onthe road.

The need for stamina and perseverance

Nor was the current diesel boom a matter of course. It began in 1989 withthe Audi 100 TDI, the first passenger car with electronically controlleddirect injection. Bosch had worked tenaciously for 15 years to get thistechnology up and running. No less demanding was the development ofthe common-rail system to the point of maturity for series production inthe mid-1990s. For example, the nozzle needle play in the injectors had tobe manufactured to a level of accuracy measured in fractions ofmicrometres, and initial yields of the pilot series were not even half ofwhat was expected. It was not easy to maintain faith in success in thisphase of development and preparation for series production.

Innovation drives alone are not enough to bring about innovations, nordo they mean that good ideas will prevail in the global marketplace.Stamina is called for, especially in the face of setbacks. The German auto-motive industry’s strong international position is also the result of long-term thought and action. In other words, technological advances are alsorooted in culture. The ability to be spurred on by setbacks along the wayand to defiantly face down temporary failures is the basis of the greatinnovative strength that has characterized the German automotiveindustry in recent years.


PARTNERSHIP IN THE CONTEXT OF GLOBALCHANGE

What does the future hold? How will the coming changes affect futurecooperation? Will today’s factors remain significant?

The automotive sector stands a good chance of maintaining its positionas one of the world’s key industries also over the next 10 years. The undi-minished desire for individual mobility, which is no less strong in today’sdeveloping countries and emerging markets than it is in wealthy industri-alized nations, speaks in favour of this optimism. Mobility forms the basisof modern society and also of a flourishing economy. As a flexible meansof transportation, the automobile plays a decisive role in this mobility.

At the same time, the automotive industry undeniably faces majorchanges. One of the biggest challenges is the shift in the focal points ofglobal growth. By 2015, Asia will overtake both Europe and NorthAmerica to become by far the world’s highest-volume car manufacturingregion. And this is more than a purely regional development: it will alsobring with it structural changes in the automotive markets. What is more,tough competition awaits established manufacturers, whether in Europe,North America or Japan, from new players in today’s emerging countries.The same can be expected for suppliers. This development is alreadytaking shape in China and India, further intensifying global competition inthe automotive sector among manufacturers as well as suppliers. In thiscontext, innovative products and processes will remain key factors, asthese alone can generate true progress in the industry.

Pressure of competition, increasing demands on innovative strengthand international presence, as well as the greater share of value addedassumed by suppliers (resulting in ever higher amounts of capitalemployed): all these factors will lead to higher levels of concentrationamong automotive suppliers. This prospect is not without its problems.After all, amid growing concentration among manufacturers over the pastdecade, it was the suppliers who provided much of the necessary flexi-bility, and thus generated crucial impetus for the further development ofthe automotive industry as one of the world’s most innovative sectors.

Considering this development, it will be even more important for theindividual supplier to hone an unmistakable and individual profile in thefuture. Those who succeed in adapting to the process of change, systemat-ically enhancing their innovative strength and international presence, willbe rewarded by considerable market opportunities.

How will this influence cooperation between manufacturers andsuppliers? The global market entry of new manufacturers and suppliers

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from developing and emerging countries will reshuffle the cards: thatmuch is certain. The question is, however, whether the rules of the game ininternational cooperation will also be redefined.

Joint responses to future challenges

If the individual mobility that only the automobile can provide is tocontinue growing on a worldwide scale, solutions to fundamental futurechallenges are required. As was touched on at the beginning of this chapter,these include the necessity to further reduce consumption and developalternative drive concepts, especially in light of finite oil reserves. Equalimportance must be attached to heightened demands on vehicle emissionsderived from increasingly strict legal regulations in all countries, intendedto counter global climate change. Furthermore, rising traffic density willnot only lead to even greater demands on vehicle safety; it will also neces-sitate improvements in traffic guidance. And the fact that populations areageing means there will be more demand for additional comfort and driverassistance, not only in today’s industrialized nations.

Finding responses to these fundamental future challenges calls forconsiderable research and development expenditures involving the entireindustry. This calls for a concerted effort on the part of manufacturers andsuppliers. It requires not only bilateral partnerships between individualcompanies, but also cooperation on a global scale. AUTOSAR is a goodexample of what such a partnership might look like.

It is precisely here that significant future opportunities for the Germanand European automotive industry lie, provided it can make its devel-opment cooperation model viable for the 21st century. Its successes arebased on networks of close ties which have grown over a long period.These represent a decisive competitive advantage, as business relation-ships of this calibre are virtually impossible to establish artificially and ona short-term basis. Alongside manufacturers and suppliers, these‘clusters’ include an outstanding toolmaking and mechanical engineeringindustry, a highly developed training system, as well as reputed collegesof applied sciences, universities and research institutes. In addition,awareness of the need to reduce consumption and protect the climate isalready strongly pronounced in Germany and the rest of Europe. For idealtest markets, the industry needs to look no further than its own backyard.

However, the essential prerequisite for mastering these major chal-lenges for the future of the automotive industry is cooperation built onshared long-term perspectives, trust and partnership. This by no meansexcludes intense competition between manufacturers and among


suppliers. On the contrary: healthy competition is the only guarantee ofprocesses that are cost-effective over the long term. Consistently workingto establish and fine-tune such processes is the responsibility of each indi-vidual company, for manufacturers and suppliers alike. However, sharedobjectives and fair rules are also a must. Each party involved must be ableto profit from such joint efforts in proportion to its contribution, allowingit to continue investing in the future and in its innovative capacity.Anything else would endanger the long-term competitiveness of manu-facturers and suppliers, indeed of the automotive industry as a whole.

Trust as a basis

Such relationships, as well as trust, will only survive if all those involvedfeel they have been treated fairly and openly. Only then will partners agreeto join forces in long-term, capital-intensive (and risk-oriented) inno-vation projects. It is on projects such as these that the future viability ofthe entire automotive industry depends.

In light of the increasingly interdependent nature of the global auto-motive industry, it is important to establish such a culture of trust on aworldwide scale. That means agreeing on shared values or basic prin-ciples. In some cases it also means returning to neglected or forgottenapproaches. Once established, the advantage of such shared principles isthat, despite cultural differences, they obviate the need for rigid rules.From a business standpoint, they reduce risks, lower costs, and create thebasis for long-term relationships. To achieve this, it is essential that allthose involved recognize the fact that close cooperation based on part-nership offers both manufacturers and suppliers decisive advantages inconfronting the common challenges they face, and thus a solid basis forsuccessfully taking the automotive industry into the future.

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241

9

Brand differentiation onthe basis of platform and

module strategiesDr Bernd Pischetrieder, Chairman, Volkswagen AG

FRAGMENTATION

The global automobile market has been undergoing an intensive processof change for some time now, with the borderlines between nationalmarkets becoming increasingly blurred and the tempo of informationgathering pace at a tremendous rate. Technical developments are increas-ingly speeding up, and at the same time the competitive environment inthe automobile markets is becoming progressively tougher.

The growing fragmentation of the markets has become one of thebiggest challenges facing the automobile industry. Recent analyses showthat in 1987, customers discerned nine different vehicle segments, theperceived dimensions of this segmentation being in particular drivingpleasure, prestige, usefulness and versatility as well as price. By 1997this number had already risen from 9 to 26 different vehicle segments,while this year our customers are perceiving no less than 40 (Figure 9.1).From the automobile manufacturers’ point of view this means that eachvehicle project requires the production of an ever decreasing number ofunits. On the other hand, however, our aim has to be to offer eachcustomer precisely the car that reflects his or her own individual tastesand lifestyle.

The continuing market fragmentation is reinforcing the already existingtrend in which the number of models and model families on offer will

grow further in the future. Moreover, the rising degree of competitivepressure will make for a reduction in the number of car producers as well.The upshot of this general situation is an increasingly declining number ofmanufacturers producing a significantly broader diversity of modelswhile building fewer units per model (see Figure 9.2). The decisive chal-lenge here lies in also being able to carry out each project successfully ineconomic terms, and secure the company’s success in the long term.

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Figure 9.1 Fragmentation of the markets

Figure 9.2 High competitive pressure caused by a continously diminishingnumber of manufacturers while the spectrum of models on offer grows

In many sectors the products are increasingly becoming more homoge-neous. Technical innovations are only decisive in the decision to purchaseup to a point, and only to a limited extent are they suitable for setting aproduct apart from those of competitors. An empirical survey examined therelevance of brands in different industry sectors. The analysis of the resultsshowed that their importance varies significantly (see Figure 9.3). Forexample, brand names are of little significance for energy providers butoccupy a very high level of importance where automobile manufacturersare concerned. In this automobiles are comparable to other luxury goodssuch as expensive watches. This means that from the point of view of ourcustomers – automobile buyers – the car represents a special opportunity toset off their own individual personality in an individual manner. The choiceof brand is thus also linked with a certain attitude to life, or set of values.

Seen against this background, the importance becomes particularly clearof the various brands and the multi-brand strategy as an integral whole,together with the associated processes. Having established this, we nowmove on the individual backgrounds and the essential steps and processphases of the multi-brand strategy.

In step one the brands are lastingly positioned in the customers’perception. The next step involves the definition of a brand core for eachbrand and the logical derivation of the brand values. The third stepinvolves determining brand-typical product and design characteristics for

Brand differentiation 243

*Empirically calculated on a scale from 1–5

Luxury goods

Automobiles

Food / beverages

Energy providers

Telecommunications

Transport and logistics

3.8

3.8

3.6

3.3

3.2

2.5

1 = no brandrelevance*

5 = high brandrelevance*

...

...

...

...

1.0

5.0

Brands have a high degree of relevance in the automobile industry

Figure 9.3 Relevance of brands in different industrial sectorsSources: McKinsey/MCM, 2002

each individual brand. Brand-typical segments and body styles are thenselected in the fourth phase. The strategy for each individual brand thenhas to be put into long-term practice at the operational level by way of anoptimal marketing mix (Figure 9.4).

Now we have looked at these aspects, it is necessary to take a look at a fewof the strategy’s fundamental approaches. The process of brand posi-tioning requires effective account to be taken of both current and futuredemographic trends. In the past, the society in which we live was largelymiddle class, but this middle class will become smaller in the future, andthis too has consequences for the strategic orientation of a large number ofbrands. This trend is already becoming very apparent.

Demographic trends could in the future have an even greater impact onthe growth rates achieved by various automobile producers, and brandpositioning orientated accordingly is already in evidence today. Producersthat, for example, positioned their brands in Western Europe as basebrands or premium brands showed the highest growth rates between 1994and 2003. This goes hand in hand with an orientation as cost or qualityleader. However, it should be emphasized that even against the back-ground of this insight, unambiguous positioning of each and every brandis nevertheless an absolute necessity and makes sense.

A further fundamental element of brand differentiation comes in theform of brand values derived from the rather abstract brand cores. The

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Definition of brand core, derivation of brand values

Definition of brand-typical segments and body styles

Definition of brand-typical product and design characteristics

Positioning of the brands in customer segments

A successful strategy is rounded off with the operativeimplementation in all areas of the marketing mix

Figure 9.4 Multi-brand strategy process

brand values are intended to firm up the brand cores and provide effectiveand lasting expression of explicit brand associations. All activities relatingto a brand have to be consistent with these brand values. Similarly, thedefined mission is orientated to the brand image and has to be authentic. Afailure of the substance of products to live up to the claims made for them,and thus also failure to satisfy the customers’ wishes and requirements interms of the brand, means that the brand lacks ‘grounding’and comes overon the whole as lacking credibility. These insights apply to a far greaterdegree in the automotive industry than in many other sectors. In addition,manufacturers with several brands are faced particularly with thenecessity to clearly demarcate their brands and models in the productsegments, in order to avoid any overlapping of product ranges and thusany risk of cannibalization (see Figure 9.5).

The basis of achieving this lies in a clear definition of the brand-typicalsegments and the unambiguous allocation of the bodywork designs.Recent years have seen an increasingly sharp downward trend wherecustomers’ brand loyalty is concerned, with new offers constantly and to agrowing extent encouraging them to abandon their accustomed brand infavour of a new one. However, in some cases it is possible to retain themas customers of the company by way of a broad product spectrum and achoice of several brands.


Porsche +203%

Audi +74%

Mercedes +71%

VW +17%Renault +15%

Opel -12%

Ford -12%

Fiat -22%

Seat +28%

Hyundai +191%

Skoda +319%

Kia + 440%

Premiummarken

Kostenführer

Qualitätsführer

‘Stuck in the middle’

BMW +31%

Toyota +110%

2003:1994 Markt +19%

Citroen +49%Peugeot +30%

Porsche +203%

Audi +74%

Mercedes +71%

VW +17%Renault +15%

Opel -12%

Ford -12%

Fiat -22%

Seat +28%

Hyundai +191%

Skoda +319%

Kia + 440%

Premium brands

Base brandsCost leaders

Quality leaders BMW +31%BMW +31%

Toyota +110%

2003:1994 Markt +19%

Citroen +49%Citroen +49%Peugeot +30%

Figure 9.5 ‘Companies without unambiguous positioning lose!’Comparison of growth rates 1994–2003 in Western EuropeSource: Newreg 2004, comparison of growth rates 1994–2003 Western Europe, unitswithout vans

It should nevertheless be pointed out that it is not nearly enough tosimply have an extensive portfolio of brands. Of far more crucialimportance is taking long-term account of essential components whenimplementing the multi-brand strategy. Two decisive aspects are aglobal orientation for the brand product policy, aimed at blanketcoverage of the markets, and at the same the creation of a largelyoverlap-free product range. A further essential factor to this end is anunambiguously clear positioning of the brands through the creation ofbrand personalities with emotional consistency, and effective imple-mentation and deployment of the brand images. In addition, ensuringlong-term consistency and high-level credibility of the brand experi-ences is a priority, starting with the product itself and going rightthrough to the marketing process (see Figure 9.6).

Accordingly, offering a multiplicity of products and bundling brands withinthe company framework are possible responses to the growing fragmen-tation of markets. On the other hand, the platform strategy as part of themulti-brand strategy is aimed at enabling ongoing expansion of the growingrange of models and series on a sound economic basis, and at the same timeoffering a higher level of quality at competitive prices. The platformstrategy involves using identical components – which the customer neithersees nor perceives – in several vehicle models and even in whole modelfamilies produced by various Group brands. What the platform does notinclude are the individual product variants, which incorporate componentsthat the customer does see or perceive.

The platform strategy has a number of advantages from our point ofview. For example the use of platform components in various models and

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Global orientation of product policy

Unambiguous positioning / Differentiation ofthe brands

Consistency and credibility of the brand experiences

Figure 9.6 Success factors of a multi-brand strategy

series reduces vehicle development times, and this in turn enables aswifter response to changing market requirements. The creation of iden-tical parts in high unit quantities has cut the costs of developing and manu-facturing individual models, as well as entire series and model families.This has also opened up the possibilities of better development of nichepotential by way of enhanced product diversity, and at the same time ofresponding to the growing degree of market fragmentation. The platformstrategy has also enabled expansion of the individual brands’ productranges, and we have enhanced the quality of our products by simplifyingand standardizing the manufacturing processes.

It remains to be emphasized that it is hardly possible to introduce anextensive new-model campaign and include various brands, at a hightempo and based on a relatively moderate input of resources, withoutusing identical platforms for several models or model families and series(see Figure 9.7).

The platform strategy does however harbour risks as well, and these arenot to be underestimated. Alongside the synergy effects, it is necessary tokeep an eye on and take account of the erosion effects in terms of brandpolicy. It is essential to ensure that the attractiveness and keen positioningof individual products and entire brands are not watered down as result ofemploying the platform strategy. It is safe to say that the greatest temp-tation, and the one that carries the most risk, lies in the possibility ofcontinuously developing similar variants on one single platform and posi-tioning them in similar or identical market segments.

The platform strategy’s variant-driven cost reduction effect leads to therisk of an ever growing number of variants being offered on a common


Reduced development times

Reduced development and manufacturing costs

Expanded product range

Simplified production processes

Figure 9.7 Advantages of a platform strategy

platform and ‘thrown’ onto the market. These products then competewith each other in similar or the same market segments, resulting in acannibalization of the products within the company’s brands. This effectcan also be described as ‘segment saturation’. Besides the effects onproduct and brand strength, the decisive risk generated by a developmentof this nature lies in the possible impact on earning power. An uncoordi-nated multiplicity of increasingly similar products generally leads torising costs and a downward revenue trend. Negative cost effects inparticular result from the inevitably arising type-specific development,production, marketing and distribution costs.

A further critical aspect lies in the cost spread, and the difficulty ofasserting a clearly defined price hierarchy when there are platform-similarproducts in a segment. The possible effects of product positioning that isplatform-driven and no longer market-driven should therefore on noaccount be left out of consideration (see Figure 9.8).

On the contrary, the positioning of new products should have been closelychecked in the definition phase. At this point any and all chances and risksshould be analysed and evaluated in detail. When taking each relevantdecision it is therefore essential to balance the advantages of the platformstrategy with the values of the brand in question, and to evaluate them. Asa matter of general policy, all product-related decisions should beanalysed meticulously and taken on a purposeful and selective basis,taking account of the chances and risks involved.

Besides the possible weak points to which attention has been drawn,there is a further fundamental deficit to be drawn into the discussion. The

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The attractiveness and positioning of individual products mightbecome watered down

Similar product variants can be developed and positionedin similar market segments

Platform-driven diversity of variants and ‘segment saturation’ can negatively impact earning power

No longer possible to assertprice hierarchies

Figure 9.8 Risks entailed in a platform strategy

platform strategy in its known form is too strongly orientated to segmentsand vehicle categories, since it is there that the focus is on the devel-opment of similar models. Development on a cross-segment and cross-vehicle-category basis is hardly possible with the platform strategy alone.For this reason, among others, combining the platform strategy with themodule strategy appears to be a line of action that makes real sense.

Under the module strategy, components and sub-assemblies are nolonger developed just for one particular model or platform. Instead,modules are generated on a cross-platform basis for use in various modeltypes. For example, an axle is developed that provides for various trackwidths and wheel sizes, and can therefore be used for a number ofdifferent models rather than one specific type or series.

If it is systematically applied and implemented, this strategy can enablefaster production of greater differentiations and new variants. This makes fornew flexibility, which better allows the use of new products in a segment to beextended, and thus, from the company’s viewpoint, enables economic objec-tives to be brought into an acceptable accord with those on the marketingfront. This is the basis for economic and thus entrepreneurial success.

Combining the platform and module strategies makes for considerableadvantages in the long term. The platforms comprise modules which itturn come from the module building blocks, and a situation should becreated in which various modules can also be used in different series. Theuse of some modules is bound to be restricted to one single series or modelfamily in the future as well, and this applies especially in cases wherethese modules are of a specific nature.

Ongoing checks need to be carried out for whether an existing modulemight possibly be used in a further series or model family, perhaps bydifferentiating it, reducing its complexity or upgrading it. Constantchecking on all modules enables the existing platforms to be kept at apermanently and consistently high technical standard, and simultaneouslyensures an even better realization of economic priorities.

A further advantage of the module strategy is that it facilitates the iden-tification of synergy potential in the module’s development phase, andhence leads to a reduction in existing complexities. Against this back-ground, the basic objectives behind the module strategy can be defined assecuring more rapid and flexible market orientation, continuous costreduction, a smoothing of investment and expenditure, as well as an easierand more cost-effective derivation of an expanded number of nichemodels. Further possibilities accorded by the module strategy lie in thesaving of time between vehicle project kick-off and market launch – inother words the ‘time to market’ – as well as a significantly optimizeduseful life in terms of technologies. Another fundamental objective to be


underlined is the achievement of enhanced quality, and all in all a solidcompetitive edge (see Figure 9.9).

A broad portfolio of brands offers companies the unique opportunity tooffer a diversified and comprehensive product range and to successfullyand lastingly establish their profile in the market. Multi-brand strategies,brand images and an individual marketing concept are decisive elements,and at the same time they form a basic prerequisite for successful oper-ation and consistent development of a broad product portfolio.

The platform strategy is a crucial prerequisite for enabling the speedyand effective implementation of a new-model campaign while meetingthe relevant economic requirements. The module strategy constitutesthe logical and intelligent advancement of the platform strategy, aboveall offering vertical development possibilities from the technical pointof view. It affords the platform strategy an evolutionary stage andenhances its overall efficiency. All in all, these building blocks offer thecompany the opportunity to continue to develop its range of productson an ongoing and selective basis, and to respond to the increasinglymore specific customer demands and wishes and market conditionseven more rapidly than before.

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Components and sub-assemblies can be used on a cross-platformbasis in significantly higher unit quantities

Differentiations and new variants can be produced faster with the aid of modules

Platforms can be permanently and rapidlyupdated by way of new modules

Figure 9.9 Advantages of a modular strategy


Product differentiationBrand portfolio

Multi-brand strategyIndividual marketing

Brand images

Platform strategy

The Company’s comprehensiveand goal-orientated product portfolio

Module strategy

Figure 9.10 Summary

10

New impetus for GeneralMotors in EuropeCarl-Peter Forster, President, General Motors Europe, Europe GM

Eighty world premieres and millions of visitors eager to see Europe’slatest highlights: the 61st International Motor Show (IAA) in 2005 offeredmanufacturers a large and spectacular stage on which to showcase theirnew models and forward-looking solutions. And that was not the onlyreason for optimism: ahead of the IAA, a significant rise in new passengercar registrations was recorded in Germany and elsewhere in Europe. Afterfive difficult years, there is light at the end of the tunnel, reaffirming beliefin a turn for the better.

This positive development is for the most part owed to new models andbuying incentives. German automakers – and especially Opel – haveperformed better than average in this area, with Opel’s success based on amajor model initiative. New cars including the retractable roof AstraTwinTop, the new Antara off-roader and the Opel GT (to be launched inspring 2007), to name just a few models, demonstrate the brand’s potentialin important market niches. Opel has also raised the bar even higher interms of versatility, innovation and emotion with its most important newedition in 2006, the completely newly developed fourth-generation Corsa.Other GM brands are also tailoring their new version to Europeancustomers. With the BLS, the luxury brand Cadillac launched a distinc-tively styled sedan developed specifically for Europe, where it is alsoproduced in Trollhättan, Sweden. Saab is also making waves with its 9–3SportCombi and completely restyled 9–5 range.

However, the positive mood among European automakers is not asstrong in all areas. While much of the long-standing resignation has all butdisappeared, intense price wars and fierce competition are forcing theautomobile industry to constantly take action. So, despite the strong

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upturn in West European markets in 2005, most automakers feel obligedto consider closing down plants and cutting their workforce. At the sametime, increasing market segmentation demands constant innovation tomeet changing customer needs and preferences. Automotive corporationsare well aware that the fledgling recovery in sales figures alone is notenough to help them survive the cut-throat price war and intensified inter-national competition.

For this reason, we at General Motors (GM) Europe are concentratingour efforts on optimizing the competitive strength of Europe as aproduction location, and on setting the stage for more growth. To accom-plish this, we must further develop the increases in efficiency we haveachieved thus far.

GM has made tremendous progress in its European operations with itsefficiency optimization programme. The region is now considered amodel for restructuring the company’s US business units. However, evenGM Europe has a lot of work ahead of it.

WORLD-CLASS CARS WITH OUR QUALITYAND PRODUCT INITIATIVE

Our initiative to augment our product development and improve qualitygives us the best chances possible to succeed in the face of tough compe-tition. In one comparison test after another, vehicles like the Vectra, Astraand Meriva continue to take home trophies. And with the new Zafira, thebest-seller enters its second generation. According to a recent studyconducted by the highly respected institute JD Power & Associates, GMhas a decisive lead on all competitors in the United States when it comesto building test-winners in the category ‘Most dependable’. The companyalso took the top spot worldwide in initial quality, with five test-winners in18 vehicle segments.

In Europe, the quality turnaround is also progressing at a similar pace,which is especially well demonstrated by the impressive figures of ourcore brand Opel. Since the JD Power institute began conducting its studiesin 2002, Opel has shown the strongest improvement of all German high-volume car manufacturers in the Customer Satisfaction Index (CSI). TheSignum achieved the greatest single success: in each of the four categoriesQuality/reliability, Appeal, Dealerships/service centres and Runningcosts, the spacious and versatile vehicle was awarded the highest scores ofany European car model. With regard to customer satisfaction, we at GM

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can confidently say that we are in the passing lane. And the Opel brand isin the driver’s seat: in comparison with competitors’products, its new carsboast the lowest operating costs of all. These are the findings of acomparison test carried out by the German Automobile Club (ADAC).

Europe’s largest automobile club is not alone in giving our Opel brandtop marks. Two of the most reputed research institutes in the automobileindustry, the Automotive Research Center at the University of Bamberg(FAW) and the Institute for Automotive Research at the University ofApplied Sciences Nürtingen (IFA), examined the satisfaction of cardealers: outstanding scores confirmed Opel’s upward quality trend.

COMPLETE SATISFACTION AMONGCUSTOMERS AND CAR DEALERS

Proof of the quality advances in Europe can also be found in reliable, keyinternal figures. For example, Opel succeeded in reducing the number ofguarantee claims by 65 per cent between 1999 and 2004. The costs ofguarantee claims and services carried out on a goodwill basis dropped by20 per cent within the same period. A new awareness for defectprevention, involving our entire workforce throughout the GM organi-zation, made these results possible. The time required by our employees tocompletely rectify a problem is now just a quarter of what it was asrecently as the mid-1990s.

GM plants are masters of product launch management. Our Europeanproduction facilities are extremely well equipped to manufacture newmodels. This too is the result of a comparison study that examined carmanufacturers and automotive suppliers, published jointly by theUniversity of St Gallen and the Aachen University of Technology(RWTH). One of the main consequences of this expertise is that the risk ofcostly and – for the customer – inconvenient recall measures is mini-mized. While the vast majority of new-model production launches byEuropean car makers in recent years failed to achieve their goals, Opeland two suppliers, along with one other manufacturer, represent thecommendable exception. Praised for its quality by customers and the tradepress, the new Astra is a prime example of a successful launch.

Opel appoints a support team for each new-vehicle production launch.This interdisciplinary group of experts supports the plants and assumesresponsibility for the development, implementation and continuous opti-mization of manufacturing processes. Depending on the complexity of the

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project, the team becomes active as early as 30 months prior to theproduction launch, to begin setting the stage for trouble-free processes.The conclusion of the reputed chair of production engineering at theRWTH and director of the Fraunhofer Institute for Production Technologyin Aachen, Prof Dr Günther Schuh was, ‘Successful production-launchmanagement can eliminate recall measures.’

SPECIALISTS AND INTERNATIONALKNOWLEDGE-SHARING

Not only the support teams are responsible for this success. All employeesin every European plant are integrated into the implementation of uniformmanufacturing processes, a key aspect of GM’s holistic qualityphilosophy. Along with staff involvement, four other principles apply:standardization, quality from the very beginning, short processing timesand continuous improvement. Every employee has an obligation to pullthe Andon cord, whenever he or she encounters a problem that cannot besolved within the defined cycle time. This sends a signal to the groupforeman, who provides immediate support. In addition, clearly defined‘quality gates’ must be passed successfully during the production process.

An integral component of this process is an exchange of information onthe international level between GM plants. The Rüsselsheim Opel factorypioneered the implementation of a standardized water test, which everysingle vehicle must undergo. After the car has spent two minutes in awater tank, quality controllers check for leakages with special electronicmoisture sensors. This test procedure proved so effective that it will nowbecome standard at GM plants worldwide. Knowledge-sharing functionsin both directions: the European GM facilities have adopted a squeak andrattle test from their American counterparts. Each vehicle must movethrough a standardized test track during final inspection by specialists,who detect and eliminate bothersome noises.

At GM it is not always the high-tech systems that advance quality:small details often make a big difference. One of the day-to-day problemsat car manufacturing plants all over the world is that workers accidentallydamage the paintwork with their tools during final assembly. Employeesat the Opel plant in Rüsselsheim have developed protective plastic sleevesfor the tips of electric screwdrivers. This idea too, however unspectacular,has an excellent chance of becoming standard practice at GM on aworldwide scale.


The key to sustainable quality improvement at GM is not just to treatsymptoms, but rather to thoroughly analyse and get to the root of theproblem. At all European GM plants, this is the responsibility of a taskforce consisting of around 275 engineers and technicians, the ‘Red XTeam’. This task force makes a significant contribution to the acceler-ation of problem-solving processes. The experts work in close cooper-ation with the Current Engineering department. The automotiveengineers and designers no longer consider their task completed themoment a new model goes into production. For each model line, a coreteam of engineers assumes responsibility for continuously optimizing‘its’ model. The European GM production facilities maintain a staff ofmore than 4,000 in Quality Promotion & Assurance in the manufacturing process.

MOTIVATED EMPLOYEES PLAY A DECISIVEROLE IN SUCCESS

In 2005, 20 Opel teams were nominated for the GM Chairman’s HonorsAward for their creativity and teamwork. The projects selected by GM aremodel examples of corporate culture, which show the way to a future ofeven more intensive global cooperation. Each of the teams has alreadydelivered outstanding performance in its area – and the nomination aloneis recognition of their excellent work. At GM Europe, team spirit elevatesbusiness to new heights. The creative ideas of employees boost efficiencyand lead to better products.

Due to the increasingly important role suppliers play in car manufac-turing, supplier quality is more and more in the spotlight. The funda-mental prerequisite for top-quality components from suppliers is closecooperation between suppliers and General Motors. A prime example isthe precisely defined process that establishes the stage at which GM canmake final design modifications to a new model, and how even marginallyinvolved suppliers are to be informed.

GM Europe gives its suppliers extensive support in maintaining qualitystandards. A team of more than 100 specialized engineers is charged withthe sole responsibility of solving any problems that arise with partners attheir source. And they perform this task with remarkable success: thequota of substandard parts from suppliers has dropped by 80 per cent inrecent years.

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EXPERIENCE AND FEEL THE QUALITY

When it comes to quality, monitoring is especially indispensable, nomatter how good the ideas and stable the processes are. At GM, pan-European ‘quality controllers’ ensure consistently high standards byappearing unannounced at the individual plants and looking over thequality auditors’ shoulders.

To regard quality as limited to manufacturing quality would be far toonarrow. We at GM Europe are well aware that our products can onlyachieve true excellence in all aspects of quality if customers are also thor-oughly convinced by the perceived quality and overall image of our cars.

Quality must be something the customer can feel and experience. Forthis reason, we have appointed more than 40 specialists at theInternational Technical Development Center (ITDC) in Rüsselsheim torepresent customers. Their job is not to judge new developments primarilyfrom an engineer’s point of view, but rather to systematically represent thepreferences and interests of the customer during the development stage.This cross-functional team, which covers a broad scope of expertiseincluding market research, design and product development, is supportedby an internal team of assistants. Eight hundred GM employees inRüsselsheim act as a representative focus group. For example, when theengineers design a new folding mechanism for rear seats or a new child’sseat fixture, they know within a few hours whether their solutions arereally as practical as they had thought.

There is a great deal more to quality than producing defect-free cars. AtGM, we have learnt that positive results can only be achieved with theinvolvement of all employees at all times. The fact that we do not acceptfaulty results – regardless of where they occur – is an integral part of ourcorporate culture.

THE CUSTOMER BUYS BEAUTY – DESIGN EXPERTISE

The look and feel of quality is not the only crucial factor in the decision tobuy a car. The design of the vehicle is also a key component, because thecustomer buys beauty first. And design is a central element in GM’sproduct philosophy.

In keeping with this exceptional emphasis, GM opened a new EuropeanDesign Center in Rüsselsheim, in the spring of 2006. Along with


ongoing styling updates of models currently in production, the design offuture models (advanced design) will take place there. The directconnection between forward-looking development and product planningas well as brand management teams will allow better utilization ofsynergies. This will also strengthen ties to the ITDC in Rüsselsheim.

The European Design Center is integrated in the Group’s global designorganization. All around the world, the multinational GM design teamoperates at 11 networked facilities. Thanks to virtual reality technology,all studios are able to work on all products. The new European DesignCenter is an important addition to this international collaboration. It is alsohelpful in securing the worldwide design leadership of GM.

The decision to locate the Design Center in Rüsselsheim also securesjobs in Germany, and at the same time reflects the confidence GM has inthe performance of the Opel organization. The GM engineers anddesigners in Rüsselsheim will play a key role in the worldwide GMnetwork in coming years. In its capacity as development location for thecompact and mid-size classes, Rüsselsheim will deliver the technicalbasis for a major proportion of the GM range throughout the Group. OurRüsselsheim employees are more than up to the task: the Opel Vectra hasclearly proven that they are among the best in their profession. And whenit comes to flexibility, hardly another automobile production facility in theworld can compare with the state-of-the-art plant in Rüsselsheim. Withthe four- and five-door Vectra sedan, Vectra station wagon and Signum,GM is currently building four body variants on a single production line –and doing so in outstanding quality. In the future, we will further increasethis flexibility and continue to expand the potential of the plant.

One reason for these ambitious plans is that Rüsselsheim has beenchosen to build a number of future vehicle architectures beginning in 2008.Selected Opel and Saab models based on a shared architecture will beproduced at this location. A comprehensive analysis of numerous factors,including capacity, required investment, wage costs, plant efficiency, flex-ibility, logistics and models of working hours, as well as currencyexchange considerations, led to the decision. The Rüsselsheim andTrollhättan plants both presented convincing studies. In the end, however,Rüsselsheim demonstrated slight advantages, and was more cost-effectivethan Trollhättan measured over the entire production period.

At the same time, we at GM Europe also have great confidence in ourcompetitive production location in Sweden, as well as in the Saab brand,whose core products will remain the models 9–3 and 9–5. And we standby Trollhättan, where we will open a Saab Brand Center. A strongexpression of the Saab brand character, it will be home to a design teammainly responsible for Saab-specific styling. In terms of design, Saab

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looks back on an exceptionally rich history. This must be preserved anddeveloped further, to ensure that future Saabs maintain this DNA, accen-tuating the elements the individualist brand Saab continues to stand forafter almost 60 years of swimming against the mainstream: sporty drivingcharacteristics, convincing functional attributes and vehicle safety.

A core team of engineers and marketing specialists will work in closecooperation with the designers at the Saab Brand Center. This team is toshape, further develop and cultivate the Saab-specific elements on alllevels – from conceptualizing future products to uniform communicationson a global scale. The main task of the Saab Brand Center will be toanswer a single question: what makes Saab so special? The Saab qualitiesshould be reflected in design, development, marketing, communicationsand many other areas.

In Trollhättan GM is also opening a new Science Office that will expandour advanced technical work portfolio in the areas of vehicle safety, emis-sions and advanced manufacturing. The new Science Office will establishcentres of expertise in Sweden and coordinate all GM activities andprojects related to research and development. In Sweden, GM profits froman extensive network of partners, including the Royal Institute ofTechnology (KTH) in Stockholm and Chalmers University in Göteborg,as well as research institutes and suppliers throughout the country. This isthe result of the extraordinarily successful work of Saab in fostering coop-eration.

The Science Office represents a natural evolution of existing collabo-rative partnerships. The Swedish government is affording GM anoutstanding opportunity to further expand its global network of partners.

PORTFOLIO POSITIONING

Opel and Vauxhall, Saab, Chevrolet and Cadillac – as the world’s largestcar manufacturer, we must position each of these brands unambiguouslyin order to precisely address the needs of a broad market spectrum. Thisdoes not mean reinventing our brand, but rather sharpening its profile inthe context of our multi-brand strategy. Cadillac is our luxury brand inthe high-end segment, while Saab is our classic, distinctive premiumbrand; Opel and Vauxhall represent the innovative, high-quality corebrands of our volume business, and Chevrolet offers significant growthpotential as the foundation brand in volume business. With each modelGeneral Motors introduces to the market, the positioning becomes moresharply defined.


The success of the new Zafira and Astra clearly shows that the branddefinition focusing on dynamics, versatility and quality is extremely wellreceived. Further models, like an SUV, will afford Opel an even broaderbase. In the case of Saab, GM initiated an important product portfolioexpansion this year with the 9–3 SportCombi; additional models willfollow. And Chevrolet puts GM in an excellent position to react to currentmarket trends with models like the economical entry-level Matiz.

An automobile manufacturer operating on a global scale requires abroad market base in Europe. This is not something we can afford to takefor granted: GM must detect trends and adapt the model portfolio accord-ingly. Even highly successful models like the Opel Vectra, Europe’s best-selling mid-size class sedan, must be updated continuously. Customersexpect innovation – in terms of both technical features and interiorcomfort – in these models too.

Our decision to market the vehicles produced by GM’s Korean businessunit Daewoo specifically for sale in Europe as Chevrolets has provencorrect. This is confirmed by our sales figures: in the first half of 2005,GM Europe sold around 117,000 Chevrolets throughout Europe, 25 percent more than in the same period of the previous year. The objective is anannual sales volume of 200,000 cars. Chevrolets are entry-level GMmodels, in Europe and worldwide. The brand is positioned below Opel,yet it offers not only outstanding value for money, but also – perhaps mostimportantly – quality, cost-effectiveness, appealing design and a longservice life. GM remains extremely active in this segment, with competi-tively priced entry-level models that look back on years of market success,such as the Matiz.

A global corporation must also be strong in the premium sector.Customers looking for a luxury automobile with an individual charactercan find the answer in the Cadillac BLS. Built in Trollhättan, Sweden, theBLS offers high-quality equipment at an attractive price. This is also thefirst Cadillac with a diesel engine, and the first to be developed especiallyfor the European market. GM Europe sees a pan-European annual salespotential of up to 10,000 units for the BLS. From a business standpoint,these are substantial figures. With dynamic cars, a state-of-the-art enginerange and innovative, distinctive design, the Cadillac brand has enhancedits luxury image with forward-looking technology.

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A DRIVING FORCE FOR THE FUTURE

Innovations first become relevant to the market when they generateconsumer interest and satisfy specific customer needs. This appliesequally to propulsion technology.

In the context of fuel prices soaring to record heights, economic alter-native propulsion concepts have become the centre of attention. Theaverage fuel consumption of passenger cars in Europe has dropped byalmost 15 per cent since 1998. The development in oil prices shows theimportance of investing in energy efficiency and renewable energysources. For this reason, we continue to expand our range of low-consumption and environmentally compatible engines. Our research anddevelopment in the area of propulsion is focused on hydrogen fuel celltechnology as a long-term solution, along with hybrid technology in theshort to mid-term. At the same time, we remain concentrated on devel-oping the future-oriented classic internal combustion engine – in terms ofefficiency, consumption and emissions. In this context, the developmentof an advanced diesel engine technology is a focal point of our efforts.GM will cooperate with Bosch and Stanford University in the UnitedStates to further optimize the HCCI engine, which burns a highlycompressed fuel-air mixture without ignition. This technology will besignificantly more efficient than today’s engines. In addition, we willdevelop a hybrid engine in cooperation with BMW and DaimlerChrysler.GM has set the ambitious goal of equipping its next generation of full-sizeoff-road vehicles with hybrid propulsion systems, which consume 25 percent less fuel, beginning in 2007.

Along with the selective activation of electrical or internal combustionpropulsion depending on the situation, further technologies such ascylinder deactivation will be used. At the IAA in Frankfurt, GM presentedthe GMC brand’s SUV concept vehicle Graphyte. Thanks to its bimodalfull-hybrid system, this automobile already achieves the stated objectivefor efficient consumption. Knowledge gained from the Graphyte will alsobenefit other GM brands. The premium marque Saab has introduced thefirst flexible-fuel vehicle (FFH) to the market. It can be operated onbioethanol or on pure gasoline in every imaginable constellation. Themodel BioPower, offered as a sedan or SportCombi, is based on the 2.0-tversion of the 9–5. The BioPower variant generates an output of 132kW/180 hp. In line with the Saab philosophy, a single unique vehicleunites various advantages: environmental compatibility and sportyperformance. The BioPower engine was developed by Swedish engineersin collaboration with GM-Powertrain experts in Brazil. This location was


no coincidence: Brazil uses pure ethanol from sugar cane to produce itsmost widespread fuel, E100.

With the world premiere of the new Zafira 1.6 CNG (compressed naturalgas) at the IAA in Frankfurt, Opel presented the new generation ofGermany’s best-selling natural gas vehicle. As the market leader in naturalgas propulsion, Opel has made these vehicles popular – one in three naturalgas vehicles sold is an Opel Zafira. Outstanding results in crash tests havedone a great deal to help dispel fears and prejudices concerning natural gascars. The Zafira 1.6 CNG boasts superb economic efficiency.

Taking average fuel consumption of approximately 5.3 kg of natural gasper 100 km and the current price of around €0.78 per kilo of natural gas,fuel costs can be reduced by approximately 30 per cent compared withdiesel variants, or even around 50 per cent compared to gasoline models.Taxes and insurance ratings are on the same level as those of its 1.6 litregasoline counterpart. The Zafira CNG with an output of 71 kW/97 hp alsooffers distinct advantages in terms of environmental compatibility: thistype of propulsion generates 80 per cent less nitrogen oxide than a dieseland around 25 per cent lower CO2 emissions than a gasoline engine(diesel: minus 10 per cent). In addition, the emissions are free from sootparticles, ensuring that the Zafira CNG is not affected by potential drivingbans in large cities.

SMART USE OF ELECTRONICS

Electronics and software are the major driving forces behind today’s tech-nological innovations. The amount of software in vehicle control unitsdoubles every two to three years, and we expect around 90 per cent offuture advances in passenger cars to be based on electronic engineering.Currently, electrical and electronic components account for approxi-mately 22 per cent of the manufacturing costs of a passenger car. In 2010,this figure will probably reach 35 per cent. As the technologies and elec-tronic innovations continue to grow in number and scope, car makers mustexercise great discretion in selecting which ones to implement. Everymanufacturer should question whether the available innovations are alsomarketable. In this regard, GM Europe pursues a very clear strategy,focusing solely on new features that are purposeful and practical. Inconcrete terms, this can be summed up in three points: new technologiesand innovations must make a substantial contribution to customer satis-faction; their cost–benefit ratio must be favourable; and the balancebetween technological progress, costs, quality and customer benefits must

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be the focus. New developments should not be dictated by what is techni-cally feasible. Ultimately, our job as manufacturers is to deliver acost–benefit ratio in healthy balance. This is why GM Europe sees furtherpotential primarily in the area of active and passive safety.

Engineers at the GM European Development Center are currently devel-oping a driver assistance system with innovative sensor technology for seriesproduction. The objective of this system is to further support the driver andincrease safety and comfort in road traffic. An integral part of the GMphilosophy is to make useful innovations affordable for as many drivers aspossible. This trend-setting driver assistance system with adaptive distanceand speed control automatically maintains a constant safety zone to thevehicle ahead in all driving situations, from stop-and-go traffic to high-speedhighway driving. Integrated in an Opel Vectra GTS, this technology is idealfor everyday use. It employs road data, along with specially developedenhanced power steering, to stay on track – in other words, the vehicle steersautomatically to correct deviations from the centre of the lane.

GM develops new technologies within the framework of the global GMGroup, which are then made available to each of our brands. This appliesto everything from future drive systems to advances in vehicle electronics.Drivers in Europe have always associated new propulsion concepts suchas fuel cells or natural gas with the Opel brand. These technologies mustbe affordable to yield real benefits, which is only possible in combinationwith high-volume production.

GROWTH ABOVE INDUSTRY TRENDS

Maintaining a position as a key player in the automotive industry meansinitiating new technological trends and delivering technology to a broadconsumer base at the right time. GM Europe is dedicated to fulfilling thistask, now and in the future. Of course this requires extensive investment,but we are convinced that the benefits more than justify the costs andefforts. A prime example is the Opel brand’s rapid rise in quality rankings– an unbeatable sales argument at the retail level. GM also offerscustomers a winning range of state-of-the-art engines. The Group’sadvances in diesel units and the particulate filter set standards. Ourincrease in market share clearly shows that quality pays off: in the firsthalf of 2005, GM sold more than 1,063,000 cars in Europe, an increase ofmore than 23,000 cars or 2.3 per cent over the same period of the previousyear. GM’s share of the generally stagnating European market grew from9.5 to 9.7 per cent.


Particularly in their home markets, the GM volume brands Opel andVauxhall developed positively, in both cases outstripping the generalmarket trend. Chevrolet continued its strong growth in Europe in the firsthalf of 2005. Saab sales varied in Europe during this period. Sales in theUnited Kingdom increased by 41 per cent, reaching an all-time high ofnearly 14,000 cars. Although Saab also achieved substantial growth in anumber of its smaller markets, including Ireland (up 12 per cent), andGermany (up 5 per cent), this was offset by decreasing sales in otherregions. The GM premium brands Cadillac, Corvette and Hummer madegood progress in their respective niche markets in 2005. Corvette saleswere three times as high as the previous year, while sales of Cadillac inEurope doubled. Hummer sales remained stable at just under 200 units.The new Hummer 3 is now being launched in Europe.

OVERCOMING A WEAK ECONOMY

Auto makers around the world face enormous pressure. Over the past fiveyears, car registrations in Europe have been declining. All WesternEuropean plants must be examined critically, as structural problems inmany countries are surprisingly similar. GM sees five major challengesfacing the automotive industry: stagnating demand, overcapacity and inad-equate productivity in manufacturing, growing competition, falling prices,and the offensive by countries with low labour costs, particularly China.

Considering the developments in the market in recent years, no companyin the industry can afford to lose any time. The negative developmentsdemand quick and resolute action. Since the beginning of 2005, GM hasbeen implementing extensive restructuring measures, with the objective ofachieving a cost reduction of at least €500 million by the end of 2006. Inorder to accomplish this, the company has reduced its workforce by 12,000employees throughout Europe. At the same time, the GM brands willcontinue their product and quality initiative. In this context, the Group placescentral importance on safeguarding all of its competitive facilities in Europe.

Design and engineering are further focal points of the restructuringprogramme. GM made great strides with the decision to locate theEuropean Design Center and the development of future vehicle architec-tures in Rüsselsheim. Duplicated operations will be eliminated, thanks tothe alignment of engineering activities in Sweden, the United Kingdomand Germany. At the same time, these synergies will strengthen each ofour brands. For instance, Saab was simply not large enough to develop itsown engineering capacity, which is necessary to build up a large premium

264 Case studies

segment portfolio. For this reason, GM is fully integrating theInternational Technical Development Center in Rüsselsheim and Saab’sTechnical Development Center in Trollhättan into the Group’s worldwideengineering organization.

This creates additional economies of scale for GM, and frees up resourcesby developing global components and vehicle architectures for a number ofbrands. The strategy also supports the development of new niche modelslike SUVs and roadsters. In addition, it yields customer benefits: GM canoffer more new models, variants and technologies in shorter periods of time.A successful turnaround starts with high quality and attractive products. Inthis regard, GM has clearly taken charge of the situation.

Everyone involved in the restructuring programme at General Motorsknows that it is not possible without painful cuts, yet the goal of imple-menting the plan without dismissals or plant closures has been achieved.

NEW MARKET CHALLENGES

The economic situation is not expected to improve substantially in the imme-diate future. In addition, demand in different car segments has fundamentallychanged, and completely new segments have been created in response toevolving customer preferences. The market in Western and Central Europe ischanging fundamentally. The mid-size segment has decreased dramaticallysince 1999, from a share of 17.2 to 13.1 per cent of the total market. Thecompact class has met a similar fate, losing over six percentage points of itsmarket share during this period. At the same time, new segments and nichemarkets have been established. Agood example of this is the development ofthe monocab or van segment, where Opel/Vauxhall already enjoys greatsuccess with the Zafira in the compact van class and Meriva in the minivansegment. GM Europe will continue to build on these successes. The cleartrend toward new segments and niche models will continue in the future. Inthis respect, one of our most important strategic and competitive advantagesis the ability to detect and cover new niche markets.

Despite the current challenges, we are by no means bemoaning devel-opments in recent years, simply objectively analysing evolving customerpreferences toward more dynamics, versatility, flexibility and comfort.GM has successfully responded to this change with a number of models.The most recent examples are successful niche models like the OpelSpeedster and Tigra TwinTop. The Astra TwinTop will continue thissuccess. The restructuring measures of GM Europe make allowances forthis segmentation, as they pave the way for more innovations. We are


developing future-oriented cars and niche models with new concepts forflexibility and versatility. GM is planning a total of 45 attractive newmodels and variants in the next five years. The reorganization of GMEurope is a key component in creating ideal conditions for its brands torealize this model initiative. At the same time, the Group is significantlyimproving the effectiveness of its investments.

ONE COMPANY

The key to success for our European business lies in thinking and acting asone single company. GM has traditionally been a multi-brand organi-zation, comprised of largely independent brands that were managed sepa-rately. There are advantages to this approach, such as the benefit of strongregional brands that adapt to and meet specific regional market needs.However, we cannot overlook the disadvantages. These include the factthat the considerable potential GM offers by virtue of its sheer size wasnot realized sufficiently. The opportunities presented by the joint vehiclearchitectures, components and processes throughout the Group wereexploited on a limited basis only.

Yet the concept of a global car, at times favoured by other car makers, isno recipe for success either. In fact this approach has never worked, norwill it work in the future. For this reason, GM pursues a strategy of balance.We strive to achieve a perfect equilibrium between centralizedmanagement and coordination on the one hand, and decentralized respon-sibility for local market needs on the other. In other words, GM is aimingfor the best of both worlds – autonomous brand responsibility hand in handwith strategic management from a single source. This is of crucial impor-tance for the future success of the GM Group, GM Europe and each of theGroup brands.

GM will continue to develop and build cars for national and regionalmarkets, supporting brand identities in becoming recognizable andtangible to customers. At the same time, shared development processes,development of new technologies, vehicle architectures and componentswill be further exploited. But the basic principle remains: GM cars areadapted to the regional markets.

In this context, GM enjoys a decisive advantage due to its size, providedthis size is leveraged efficiently. All of the resources that a global playerlike GM has must be utilized, while redundant processes and duplicateddevelopments within General Motors Europe and the Group as a wholemust be eliminated.

266 Case studies

All Group brands and divisions in Europe will be steered on a uniformcourse in the same direction, under the umbrella of GM Europe. GM isfollowing the clear objective of further cultivating its brands. To this end,GM determines the positioning of each brand in its market.

The strength of a multi-brand organization like GM Europe is not onlyof key importance in terms of leveraging size advantages: the proportionsand performance output of a company are also decisive in mastering theincreasingly rapid developments in technology. Here, the automotiveindustry as a whole faces enormous challenges.

As the world’s largest automobile manufacturer, GM is in a position tocapitalize on the benefits of its size in this area as well. Complex and cost-intensive research, development and engineering efforts can be carried outa single time, yet the benefits are reaped by all Group brands. Businessrisks are minimized, as the expenditures for innovations can be shared bya number of brands. Moreover, the strategic innovation management ofGM looks at new technologies critically. The decisive factor is alwayswhether or not an innovation delivers tangible benefits to the customer.Ultimately, the key question is, is the customer willing to pay for thisadded value? This makes early and close cooperation between marketingand development crucial, in order to successfully transform market needsand preferences into concrete technological developments.

Of course we consider all available technologies in vehicle devel-opment. They are integrated in the technology portfolio, but only if andwhen a sensible balance between progress, costs, quality and realcustomer value can be achieved. Although new technologies can play animportant role for the customer, this is not necessarily the case. The bestexample of smart handling of technological innovations is the chassis ofthe new Opel/Vauxhall Astra. GM used an enhanced McPherson strutfront suspension and a specially adapted torsion-beam rear axle in theAstra, utilizing proven, top-quality solutions. The Group also offers theoptional IDSPlus chassis (interactive driving system) with electroniccontinuous damping control (CDC) and networking of all drivingdynamics systems in an integrated chassis control (ICC) system.

This technology ensures balance between driving dynamics andcomfort with increased active safety on an even higher level. Thenetworking of ABS, CDC and ESPPlus is an innovation not only in thecompact class, but in the entire automotive industry. This is precisely thetype of innovation customers are willing to pay for.

The focus of a company of the size and standing of GM must not be onlyon the short and mid-term cycles of technological progress. That is why theGroup is already actively working on long-term perspectives of individualautomotive mobility. For example, the company has thus far invested US $1


billion in the development of fuel cell vehicles. The result of this investmentis the HydroGen3, a close-to-production prototype based on the OpelZafira, which has already proven itself in everyday use. The HydroGen3 hassuccessfully passed another endurance test, emerging as victor among fuelcell cars at the first ‘Rallye Monte Carlo Fuel Cell and Hybrids’.

GM’s European and global resources are a decisive factor in bringingfuel cell technology to volume production maturity. All GM brands willbenefit from this, but no one brand alone could carry the burden of devel-oping and introducing to market such a groundbreaking technology.

DESIGN TREND-SETTER EUROPE

Just as a new, highly efficient production system was decisive for the reor-ganization of GM plants in the United States, Europe is the role model fordesign of passenger cars. We have fundamentally changed our philosophy,and boring draft designs or superfluous ornaments do not stand a chance atGM Europe. A major purchasing factor is the emotional currency of a cardesign. Accordingly, GM Europe has introduced a new design languageand new vehicle formats, leading the way into a stylistically new future.The new models must reflect the character, history and cultural back-ground of the brands and successfully carry on their line of ancestry. It hasalways been the objective of GM Europe to build cars for individualistswishing to express their passion for cars outwardly. A perfect example ofthis is the legendary Opel GT. The Rüsselsheim car maker has alwaysunderstood how to interpret the French coupé – cut-off – in a car withsporty lines and a flowing rear form. Opel coupés were crosses betweenlow-cost volume production technology and powerful engines. Asuccessful line of predecessors testifies to this, from Commodore A, B andC to Monza and Calibra. This successful tradition of sporty and affordablecars will be continued with the OPC (Opel Performance Center) models.The high-performance variants of the Astra, Vectra and Zafira are morepowerful, faster and more dynamic. Further OPC models will follow.With exciting niche models like the Tigra and Astra TwinTop, the GMbrand Opel is putting more focus on emotional appeal and dynamics.

Our premium brand Saab is also very successful with cars that evokeemotion. The 9–3 Cabrio and 9–3 SportCombi meet the individual tastesof customers in a special way. The latest JD Power Institute studyconfirms that Saab brand cars have markedly improved in reliability,quality and cost-efficiency.

268 Case studies

WELL EQUIPPED FOR A SUCCESSFUL FUTURE

Decisive factors in mastering the challenges the European automotiveindustry faces will be competitive strength and a heightened focus ongrowth. Key measures include increased work flexibility, a reform of thesocial security system and renouncing any further increases in the cost ofmobility. Those who act in a timely and consistent fashion have the bestchance of retaining a healthy work environment. Auto makers have to findnew ways of adapting to the changing global competitive situation, suchas diversifying product portfolios. The speed of innovation is very fast,particularly in the electronics area. New technologies such as fuel cellpropulsion must be developed to market maturity. This all has to happen atthe same time, under constantly mounting cost and competitive pressure,and this pressure has not even reached its peak in Western Europe. Themarket is almost saturated and substantial growth is not in sight. Theresult of stagnation and shrinking markets is massive overcapacity, as isthe case in Germany. Experts calculate that the average utilization of auto-mobile plants in Europe is currently less than 80 per cent, while the break-even point is at around 85 per cent. At the same time, some manufacturershave announced they will increase their production capacity in Europe,which will introduce an additional 1 million units to the market.

Analysts predict a crisis along the lines of that in North America. Inorder to keep plants operating at full capacity, more and more cars areoffered with rebates. This increases price pressure and reduces prof-itability. And the long-term picture does not look any prettier: competitorsfrom China and India are entering the European market. The latest IAA inFrankfurt gave us a small taste of where this will lead.

Initial exports to Europe and the United States have focused attentionon cheap cars from China. These manufacturers, which presented them-selves for the first time at the IAA in Frankfurt, have a long, rocky roadahead of them. So say Chinese experts, pointing to problems with qualityand customer service. But their sights are firmly set on Europe.

GM Europe is ready for increasing competition in the coming years. Therestructuring plan has put the brands and business processes on the rightcourse. We have now positioned ourselves to meet our goals of a competitiveemployment environment in ultra-productive sites coupled with strong, prof-itable brands. We continue to look far ahead with confidence, and our modelinitiative is a visible expression of this future-oriented approach.


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11

How electronics ischanging the automotiveindustry: from componentsuppliers to systempartnersPeter Bauer, Member of the Management Board, InfineonTechnologies AG

THE EVOLUTION FROM COMPLEXMECHANICAL TO COMPLEX

ELECTRONIC SYSTEMS

Since transistors were first fitted in cars in the 1970s, vehicles haveadvanced from being complex, predominantly mechanical systems tocomplex and increasingly electronic systems. Simple electrical systemswere initially used to supply power to lighting and powertrain compo-nents. Today, however, very few mechanical functions are not influencedor improved by electronics. A plethora of new functions have also beenadded: we need only think of ABS, stability control, airbags, air-conditioning, rain sensors, distance warning systems, navigation systems,on-board troubleshooting, driver assistance and telematics services. Awhole raft of power, safety, convenience and infotainment applicationswould be unthinkable without electronics (see Figure 12.1).

Despite all this progress, the pervasiveness of automotive electronics isstill in its fairly early stages. The potential for electronic innovation inconvenience applications is nowhere near exhausted. And safety systemsin particular – including driver assistance systems – are expected to postthe strongest growth in the years ahead. Roland Berger estimates that,over the next 10 years, the electrical and electronic content of vehicleswill increase from a good 22 per cent in 2005 to around 32 per cent in2015 (see Figure 12.2).

How electronics is changing the automotive industry 271

n Electronicignition

n Checkcontrol

n Speedcontrol

n Centrallocking

n etc.

n Electronicclimate control

n ASC: anti-slipcontrol

n ABS: anti-lockbrakingsystem

n Telephonen Seat heating

controln Auto-dimming

mirror

n Advanced MMIn ALCn AFSn Night visionn TLCn ACC stop & gon Force feedback

pedaln Lane changing

warningn Int. energy

managementn Local hazard

warningn CO2 reductionn Telematicsn Online servicesn Integrated

security systemsn Fuel cellsn LH2n Individualizationn Software

n Navigationsystem

n CD changern Bus systemsn ACC: active

cruise controln Airbagn DSC: dynamic

stability controls

n Roll stabilizationn Xenon lightn RDS/TMGn Emergency

callingn Servotronicsn Electronic

suspensioncontrol

1970 1980 1990 2000

4004

80286 80386

80486

Pentium ®

Pentium II

Pentium III

Pentium IV

8080

8086 68000

2010 …

n Electro-mechanicalvalves

n Tyre pressuresensors

n 42 volt systemn Impact

protection

n Throttle-by-wiren Black boxn Bluetoothn Multimedia

systemsn Wireless

connectivity

n Electronicinjection

n Electronic

n Steer-by-wiren Brake-by-wire

transmissioncontrol

n Adaptivetransmissioncontrol

Networking

Figure 11.1 Development in automotive electronics, 1970 to 2010

1995 2000 2005 2010 2015

Averageelectrical/electronicshareper vehicle (E)

1,338 2,430 2,561

Electronic systemsand electronic controlunits

22.4%21.5%

12.0%

electrical/electroniccompoundannual growth rate share(%)

28.8% 31.9%

16.1%13.5%9.2%

20.9% 22.4%

6.3% 7.9% 9.5%

3,7563,341

Electrical systems

Total E/E share

+6.4% +3.6%

Figure 11.2 Steadily increasing electronic content in vehiclesSources: Strategy Analytics, Roland Berger analysis

In future, scarcely any innovations in automotive engineering will not bebased on electronics. For those component suppliers that specialize in thisdiscipline, that is good news indeed. Semiconductor firms, for example,are benefiting from automotive electronics’ voracious appetite for thewhole spectrum of semiconductor products, ranging from sensors, micro-controllers and power semiconductors through memory products to chipsfor wireless communication. Between now and 2010, in-car semicon-ductor content is projected to leap by some 50 per cent.

The automotive industry – caught in the productivity vice

At the same time, rampant growth in the ‘electronification’ of automobilesis also confronting the supply industry and car makers alike with many andvaried challenges. Technological advances (and the danger of fallingbehind) place the automotive industry under tremendous pressure toinnovate. Statutory requirements relating to safety and environmentalprotection are having the same effect. So too are customers’ demands forever greater functionality. However, since consumers are generallyunwilling to pay more for new technology, inflation-adjusted prices willstagnate in just about every vehicle class. Car manufacturers therefore haveno choice but to consistently raise their productivity (see Figure 12.3).

The requirement for more innovation at lower cost, coupled withdemands for top quality and absolute reliability, means that the pressure tobecome more productive is not restricted to car makers alone, however.Upstream links in the value chain are feeling the full force of this trend.Quality standards of the kind one would normally only expect in aero-space or military contexts, but at prices reminiscent of the entertainmentindustry: that neatly sums up what auto makers today expect of the supplyindustry. Under cost pressure themselves, auto companies are demandingthat their suppliers cut prices by between 3 and 10 per cent per year. Whatsome manufacturers evidently do not realize, however, is that there arelimits to the ability to optimize the cost of existing systems or reap savingsfrom economies of scale. They fail to grasp that the component supplyindustry alone will not be able to continue financing innovation in the longrun. As a rule, first-tier suppliers tend to pass on this cost pressure to theirown subcontractors. Semiconductor firms, for example, must thereforeask themselves to what extent they can make a contribution to innovationand quality in a market that is dominated by car makers and first-tiersuppliers (see Figure 12.4).

This challenge can only be mastered by a paradigm shift in the auto-motive value chain. This paradigm shift is linked to a specific realization:

272 Case studies


100in %

Marketpenetration

Years1st productlifecycle

2nd productlifecycle

90

80

70

60

50

40

30

20

10

00 5 10 15 20 25 30 35 40 45

Must-have technologyLegal requirements/safety(eg ABS, airbag, seatbelts,ESP)

Nice-to-have technologyComfort (eg air-conditioning, powerwindows, central locking)

Niche technologyIndividual thrills (eg memoryfunction, trunk extender, seats with massage function)D

evel

op

men

t d

irec

tio

n

40 sample technologiesexamined using a 35-yeartimeframe

Figure 11.3 The pace of innovation introductionsSource: McKinsey/PTW-HAWK survey 2003

Figure 11.4 The automotive industry is taking heat from all sidesSources: McKinsey/PTW-HAWK survey 2003, Infineon

it is not the number of extra features and fittings that will determine acompany’s lasting success. It is more important to develop appropriatebusiness and profit models that shape the underlying cost structures, andalso to establish a suitable position in the value chain. Finance is thereforethe biggest issue facing the automotive industry. Given the growingcomplexity of automotive electronics, how can a constant stream of inno-vation be churned out reliably and affordably? And who is to bear the costof this innovation?

The need to get a handle on growing complexity

The growing complexity of vehicle platforms is a subject intimatelylinked to the fast pace of innovation – and another subject with which carmakers and suppliers must concern themselves as they examine financingissues. Loosely interconnected electronic control units (ECUs) havedominated this segment of the industry hitherto. Future innovation,however, will depend on deeply integrated and closely networkedsystems. As many as 80 electronic systems and components still coexistindependently in today’s cars. Forecasts nevertheless indicate that, by2010, they will all be networked and will interact to a considerable extent(Figure 12.5).

This advanced level of networking is a fundamental precondition ifnew, cross-system functions – mostly to enhance safety – are to be imple-mented, and if synergies are to be tapped in order to reduce costs.However, precisely this development gives rise to complex functionalinterdependencies between the various electronic components. For automakers, it is imperative to master these interdependencies. Why? Simplybecause every extra sub-system and every extra electronic control unitincreases the statistical probability that different sub-systems couldinterfere with each other – and that the whole system could then fail.

There are all kinds of ways in which companies are trying to get ahandle on this growing complexity and to square the circle that demandsever more functionality at ever lower cost. One method to which both thesupply industry and the auto makers are giving their backing is to establishstandards. Breaking down all in-car electronic systems into structureddomains is another approach. Manufacturers such as BMW and supplierssuch as Bosch are treading this path. The outsourcing of larger assembliesto a single supplier is likewise under discussion. However, although bothsuppliers and car makers are energetically exploring so many differentavenues, the search for the ultimate solution will probably not be over forsome considerable time, for a variety of reasons.

274 Case studies

Competence in electronics – a critical factor ofcompetition

Rapid innovation and the spiralling complexity of in-car electronics arealso increasing the potential for technical risks that, at worst, could lead tobreakdowns, system failures and recall campaigns. Any of these possibil-ities would prove very expensive. It is therefore important to get a handleon the risks too, as on the technology itself. Problems can arise, forexample, when car makers include innovative electronic developments inmass-produced models before the innovations are fully mature.Accumulating electronics expertise would be one way for auto companiesto minimize these risks. Indeed, auto makers that see themselves as inno-vators have no choice but to build up competence in electronics in-house.

THE CONVERGENCE OF TWO VERY DIFFERENTINDUSTRIES

Historically, most car manufacturers have obviously leaned more towardsmechanical skills. Unlike their traditional core competences – vehicledesign, body construction and engine development – electronics expertisewas for a long time the exclusive preserve of specialized electroniccomponent suppliers. Since those days, most car makers have realizedthat they cannot get by without a command of electronics, and have taken


Dimmableexterior mirrors

Automaticclimatecontrol

Enginemanagement

Tyre protection

Figure 11.5 Individual applications are developing into complex networksSources: Mercer/Hypo Vereinsbank

steps to acquire skills in this field. One reason is that they do not want tofall behind their competitors. Another is to avoid becoming completelydependent on outside suppliers. Premium manufacturers in particular arespearheading this trend. For them, electronics is now clearly recognizedas a core competence.

The trend is also reflected in the practice of launching subsidiaries (suchas BMW Car IT, Audi Electronics Venture and the Porsche EngineeringGroup), in the establishing of competence centres (such as the AudiElectronics Center, which opened in mid-2005), in moves to ramp up in-house development departments, and in the introduction of specific elec-tronics strategies. Auto makers are also recruiting more and moreelectronics engineers and IT experts.

It is, as we have seen, important for car makers to deepen theirknowledge of electronics, but not only because of the technical risksmentioned above. Unless these companies fully understand what auto-motive electronics really involves, how will they ever be able to optimizethe way they assign tasks to outside suppliers? How will they be able tojudge and coordinate these efforts? The same principle applies to thecommercial appraisal of suppliers’ performance. Unless they acquire asuitably detailed technical understanding, car makers will be unable toreliably compare the components and services of different suppliers. Byno means least, they will not be able to optimize the in-car integration ofcomplete electronic systems unless they have the skills they need to do so.

As more and more electronic content finds its way into cars, the needfor an in-depth knowledge of software will also grow in the next few yearsas this becomes a focal point in the value chain. Software lays the foun-dation for all kinds of new in-vehicle functions, over and above deeperintegration and greater flexibility. For example, software can allow newapplications to be built into a car during its lifecycle.

Car makers clearly see this as a new source of revenues. Consequently,they will increasingly use software as a unique selling proposition. Hereagain, however, specific knowledge is needed in order to find newbusiness models with which to tap software’s potential to the full. Anexample from the mobile communication industry illustrates just howimportant this factor is. Some mobile phone makers have tried to buy inentire platforms and outsource software expertise in the volume segment.However, their attempts have showed that market success is closely linkedto a mastery of the technologies involved. In this industry, the successfulplayers are those that have kept and cultivated in-depth, application-oriented software engineering competence in-house.

For many auto makers, software is a relatively new field. Especially inthe area of software maintenance and updates, many questions remain

276 Case studies

open and can only be resolved in close collaboration with suppliers.Software expertise will play an ever more important role in the specializa-tions that emerge within the automotive value chain in future. As softwareaccounts for an increasing share of automotive electronics, this will alsochange the processes involved. The automotive industry is thereforecalled on to learn lessons from the IT industry.

Electronics suppliers are growing in importance

Although they are building up their own electronics expertise, car makersdo not seem desperately interested in expanding into the relevant supplylinks in the value chain. They rather seem to want to secure a position as‘informed customers’. A study by Mercer Management Consulting, forexample, found that suppliers added 84 per cent of automotive electronicvalue and car makers only 16 per cent in 2002 – and that this ratio will notchange significantly in the years ahead. In light of pressure to raise produc-tivity and cut costs, not every car maker will readily have the resources toinvest in ramping up electronic content in vehicles. Accordingly, manylinks in the chain will remain in the hands of outside suppliers.

If only because of widely varying innovation cycles and the problems towhich this leads, suppliers will in fact assume an even more prominentrole. As electronic content increases, electronic control components will


Hardware Software

2000 2010

5100 bn

5 25 bn

5 170 bn

5100 bn

Market volume5270 billion

Market volume5125 billion

+ 400%

+ 70%

Figure 11.6 The market volume of automotive electronics is going upSources: Mercer/Hypo Vereinsbank

rank as standard replacement parts. Auto makers will therefore have toensure a steady supply of electronic components throughout the entireproduct lifecycle. This is problematic, however, because development andproduct lifecycles in the automotive and semiconductor industries are wayout of sync. Whereas development lead times in semiconductors rangefrom 9 to 24 months, it takes the auto industry three to five years todevelop a new vehicle model. This model will then normally be manufac-tured for around seven years and used for a further 15 years or so afterproduction stops (Figure 12.7). Obviously, then, car makers will dependheavily on their electronics suppliers to ensure that replacement partprovisioning continues to run smoothly.

There is no easy way to bridge the gap between the pace of innovation inthe automotive industry and that in the semiconductor industry. If carmakers were to adapt to the dizzying speed of semiconductor devel-opment, in-car electronics would have to be redesigned every time a newsemiconductor component came onto the market – even after productionof a model had been discontinued. On the other hand, stockpiling elec-tronic components for 20 years or so is extremely difficult and expensive,not only because of the sensitive nature of such components. Storageoptions are also hampered by the facts that only rough estimates of actualdemand are possible – and that no one wants to bear the added risk (andassociated cost) of maintaining such huge inventories.

278 Case studies

Lifespan of15 years

Lifespan of3–5 years

Development,9 months

DevelopmentLifespan

Semiconductor

Consumer

3 months6 months

Figure 11.7 Various technology cycles

ZVEI, the German electrical engineering and electronics industry asso-ciation, has set up a workgroup to examine the ‘long-term provisioning ofelectronic replacement parts for the automotive industry’. Car makers,suppliers and chip manufacturers (including Infineon) are collaborating inthis group to formulate suitable models. Standardizing the componentsused and committing to the retro-development of components whosestocks are exhausted would be one possible option. In light of the hugecosts involved, however, this possibility is of limited practical value. Byimproving storage capabilities, it would at least narrow the provisioninggap. The cost would nevertheless remain exorbitant.

The early exchange of information throughout the entire process chaincould also solve some of the provisioning problems. This might even workwhen changes are made to semiconductor products while a vehicle modelis still being produced. Clear communication and greater transparencywould nevertheless be needed to ensure long-term provisioning and guar-antee quality levels. Only then can the full potential of innovation in elec-tronics be exploited and applied in the auto industry. Auto makers willdepend on strategic partnerships with semiconductor manufacturers,which in turn must clearly commit to ensuring the long-term availability ofthe technologies needed by automotive electronics. In this context, carcompanies must nevertheless remember two important things. One is thatmaintaining ageing technologies necessarily incurs additional costs. Theother is that long-term provisioning can only be guaranteed by semicon-ductor firms for which automotive electronics is part of their core business.

THE CHALLENGE OF SYSTEMS INTEGRATION

Automotive electronics is a fertile breeding ground for innovation. It isspawning a rich diversity of systems, modules, components, operatingsystems and software from a variety of manufacturers. Added to thisvariety are ever more complex development structures, multi-layersoftware models and increasingly extensive bus protocols. All of thispushes up the cost of integrating both hardware and software in vehicles.The relevant players in the automotive value chain must therefore askthemselves how systems integration can be simplified despite thisgrowing complexity, and how they can at the same time ensure that func-tionality and quality are maximized.

We have already touched on one way to reduce complexity and therebysimplify systems integration, namely a model (operated by manufacturerssuch as BMW) that carves systems integration up into structured domains.


This model groups individual functions that exhibit similar requirementstogether with the related control units to form larger domains. Withinthese domains, central control units integrate a number of functions (aswell as actors and sensors) that possess their own built-in intelligence. Theseparate domains can then be networked using proven bus systems such asCAN and LIN, or using new, deterministic systems (such as Flexray) thatare currently being crafted by industry committees. To ensure that thewhole construct works smoothly, the principles of this domain archi-tecture must be reflected in the way systems are partitioned.

Many pundits see open, standardized solutions as the high road toseamless communication between the individual systems and control units.They also believe that this approach will simplify the task of networkingsystems from different suppliers. Consequently, numerous initiatives suchas HIS (a manufacturers’software initiative) and development partnershipssuch as AUTOSAR (Automotive Open System Architecture) are strivingto standardize software interfaces and software modules (Figure 12.8).AUTOSAR aims to develop an open standard for in-vehicle electronicarchitectures, and thereby to make it easier to reuse (and interchange)software modules across different types and classes of automobile.

A single, standard platform that defines the fundamental software archi-tecture and basic functionality would slash costs in two ways. It would notonly shorten development times, it would also vastly simplify the processof integrating new functions. When individual components needed to bereplaced, it would no longer be necessary to redesign the entire systemevery time. Instead, the modules or add-on components concerned couldsimply be plugged into the appropriate software interfaces. This wouldsharply increase the proportion of fully tested and proven modules, whichin turn would reduce system costs and improve quality in the long run.

Does standardization raise a barrier to competition?

Standardization is definitely one feasible way to master the complexitiesof automotive electronics and systems integration. Even so, it will stillprobably be some time before a uniform standard is in fact applied. This isonly partly because standardization is a very protracted and laboriousprocess. (It can take years to advance from verification to formal ratifi-cation.) Another reason is quite simply that the various market playersattach different degrees of importance to this issue.

Cursory examination might lead us to the conclusion that the car makersare the only players who would benefit, because fiercer competitionbetween suppliers would give them more flexibility to pick and choose

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their partners. The fact is, however, that standardization would initiallyimpose a much heavier burden of development expenditure on componentsuppliers in particular, especially in relation to software engineering. Yetthe smaller suppliers especially will not be able to fund such developmentas things stand. In other words, contrary to the economic laws of standard-ization, we might see precisely the opposite effect occurring: competition– and hence the car makers’ freedom to choose – might actually be furtherrestricted as higher expenditure and lower margins drive a number ofsuppliers out of the market.

A ZVEI paper on standardization addresses the issue of whether stan-dardization prevents competitors from distinguishing themselves fromeach other. One could take this question a step further and equate stan-dardization with the interchangeability of products, systems, and ulti-mately of manufacturers themselves. In this case, one could conclude that,in committing to standardization initiatives such as AUTOSAR, suppliersare investing in making themselves replaceable. This obviously cannot bein their interests. Alongside the need to improve quality and safety,therefore, there must also be plausible economic reasons for semicon-ductor firms such as Infineon to take part in development partnershipssuch as AUTOSAR and actively advance the cause of standardization.


QuickTime™ and a

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are needed to see this picture.

SW

component 1

AUTOSARinterface

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component n

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AUTOSAR RTE

■ Transport levels for various different communication technologies

(eg CAN, LIN, etc)

■ Network management

■ System services (diagnose logging, etc)

■ NVRAM management

■ etc.

Basis software

Microcontroller abstraction

ECU hardware

Figure 11.8 AUTOSAR standardization initiative

By sensibly standardizing basic electronic functions that do notconstitute unique selling points, both car companies and suppliers can ridthemselves of links in the value chain that are necessary, but that do not setthem apart. This will leave them free to focus on activities that directlyimpact value creation. In the context of the standardization of automotiveelectronics, market players will set themselves apart – and thus compete –primarily by varying the way they use software and implement specificfunctions and operating models.

The important thing is that car makers must not see standardization as away to squeeze the entire supply industry into a single mould. Instead, itmust be grasped as a means to reduce complexity and to simplify systemsintegration. Standardization must leave room for differentiation. It mustpresent no obstacles to deeper integration. Thus, if standardization were togo too far, that would ultimately put the brake on innovation.

Who is responsible for systems integration?

As more and more components and modules need to be integrated, afurther question arises: who will be responsible for systems integrationtomorrow? Is it conceivable that a partner in the supply industry will infuture ensure that all the systems and modules fit together? Devolving fullresponsibility (or at least responsibility for large packages of activities) toa supplier would have two advantages. It would sharply reduce frictionallosses at the interfaces between different systems, and it would vastlydiminish the cost of cross-system harmonization. The downside is thatonly a very small number of hand-picked suppliers have the breadth ofknowledge that such a complex assignment would necessitate.

Liability is another key issue in this context. Some auto makers arecurrently charting a rather ‘schizophrenic’ course. They want to delegatesystem responsibility, complete with liability, to their suppliers. At thesame time, however, they want to retain control because they are afraid ofbecoming too dependent. Separate responsibility from competence,however, and it is only a matter of time before problems begin to arise. Itis not unusual for deficient coordination to threaten entire projects. Thiskind of approach does not only place a burden on development: in manycases, the players involved seem to forget that a working, self-containedsystem can be less expensive than the sum of the costs of individualcomponents if these then also have to be integrated.

Given the large number of players involved, overall project managementis manifestly the key to successful systems integration, and this key mustbe in the hands of the car maker. Overall project management forges the

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link between different suppliers, each of which, in accordance with the carmaker’s specifications, delivers separate but networked sub-systems. If thecompanies involved are not brought together around the same tablethroughout the entire process, it is unlikely that a workable solution will bethe outcome. Problems are bound to occur in the attempt to develop andcoordinate so many sub-systems. Moreover, the car maker depends ontransparency with regard to the suppliers’processes. Aclear overview of alltributary processes is essential if all the different systems are finally to beblended together perfectly in the vehicle concerned.

KNOWLEDGE AND BUSINESS MODEL-RELATEDDEPENDENCIES FOR AUTO MAKERS

Auto makers depend on the expertise of their suppliers, but they equallydepend on their suppliers’business models. Automotive electronics is such acomplex discipline that specialization within the supply industry is devel-oping an ever narrower focus. As a result, only a limited number of supplierscan produce certain systems. Small and medium-sized suppliers mightsurvive if they have a clear technology lead, but they will have great diffi-culty realizing the savings on which car manufacturers insist. Semiconductorfirms, on the other hand, definitely need both a certain critical mass and abroad product portfolio if they are to rise to this challenge.

The scope of competence that stays in-house will largely be determinedby the auto makers’ sourcing strategy. In the United States and to someextent in Europe, a trend toward purchasing strategies that are purely cost-driven has been in evidence for some time. This practice has even reachedthe stage where many auto companies auction their orders over theinternet. We must nevertheless query the extent to which this kind ofsourcing strategy can foster the long-term collaboration from whicheveryone – not only the car makers and their suppliers, but also car buyers– will ultimately benefit.

Selecting suppliers purely on the basis of cost might let car manufac-turers save money in the short term. In the long term, however, the draw-backs will doubtless weigh heavier. This kind of strategy promotes anarrow focus on price that can choke off innovation and can, at worst, alsoundermine quality and vehicle safety. This is surely not the road downwhich makers of automobiles wish to travel. Purchasing strategies that areconcerned exclusively with costs are indeed the main hindrance to long-term strategic collaboration that aims to build win–win constellations


across different links in the value chain. However, vehicle manufacturerscannot escape from the productivity vice unless they engage in preciselythis kind of close, strategic partnership with a few hand-picked suppliers.

Large auto makers of the calibre of BMW and Toyota have long sincecommitted to such strategies – and are now reaping the rewards. Positivecollaboration with suppliers is reflected both in regular supplier appraisalsand in the commercial success of these companies. Toyota, for instance,actively encourages collaboration between its suppliers. Rather than beingcontent with a traditional stance right at the end of the value chain, it actsmore like the conductor of a huge orchestra, ensuring that each playerstays in harmony with all the others.

A new quality of collaboration

There is an urgent need to extend this kind of partnership along the wholevalue chain. This is because architectural decisions taken unilaterally bycar makers, and the way system component suppliers choose to divide uptheir systems, can already have a major impact on the cost structure ofsemiconductor solutions. Technologically reliable products can be createdonly if auto makers and suppliers collaborate closely as partners. To avoidthe effort and expense of having to cultivate lots of partnerships but tomaintain an element of competition, many car companies today operate a‘second source’ strategy. In this constellation, the manufacturer concen-trates on one main supplier and one secondary supplier, to which a smallervolume of orders is awarded. For technologically less sophisticatedcomponents, system suppliers are free to choose their own componentsuppliers – a fact that leaves this procurement market highly fragmented.For technologically more sophisticated components, car makers usuallyrestrict the system suppliers’ choice of possible component suppliers. Thisshort-listing practice is heavily influenced by component suppliers’ tech-nical expertise, quality and reliability.

Some auto makers also encourage additional component suppliers todevelop proprietary solutions. This makes it increasingly difficult for indi-vidual semiconductor manufacturers to innovate, however. In this situation,many of them are unable to tap the economies of scale that are so vital to thesemiconductor industry in particular. Consequently, only large semicon-ductor firms that bundle the demand that exists in a fragmented market, anddemonstrate technical skills that go beyond their own products, will infuture be able to deliver the necessary level of quality and innovation.

Both auto makers and suppliers that have not yet grasped the impor-tance of working together as partners must rethink their positions. If they

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want to stay competitive, both must inject a new quality into their relation-ships with their suppliers. Ideally, collaboration between componentssuppliers, system suppliers and car makers will be very close.Semiconductor manufacturers must be involved as early as possible in thepreliminary development and development projects run by first-tiersuppliers and the car makers themselves.

For many years, Infineon has been working closely with both systemsuppliers and automobile companies in order to supply efficient and opti-mally tailored semiconductor solutions. To fully understand what anapplication requires at an early stage, and to ensure that its solutionsgenuinely meet these requirements, Infineon engages in in-depth dialoguewith the car makers. This form of interaction also plays an important partin the early development of innovative products.

When development contracts are awarded, finance is often treated more orless as a mere footnote to the ‘real’ issues. Yet low margins and fierceglobal competition have brought many suppliers – and not only the smalland medium-sized enterprises (SMEs) – to the very limits of theirfinancial capabilities. Working in a highly volatile industry whose capital-intensive nature places heavy demands on capital markets, semiconductorfirms in particular rate financing as a singularly important matter. In otherindustries, low single-digit margins might be enough to satisfy investorsand cover the cost of capital. Not so in semiconductors, however, wherefirms have to earn margins upward of 10 per cent. That is why any


Sub-system/application

Figure 11.9 Business model for a successful future

discussion of future collaboration and cost distribution along the valuechain must also look closely at new business models.

THE NEED FOR NEW BUSINESS MODELS

Standardize and cut costs, yes, but make sure you innovate too. Delegateresponsibility and liability, but make sure you stay in control. Avoidquality costs, but keep the supplier landscape fragmented to avoidunhealthy dependencies. The fact that many auto makers feel trapped inthis area of conflict is primarily attributable to severe cost pressure.However, they cannot escape from this area of conflict simply bydumping all the burdens on the supply industry. The only way out is toengage in partnership and collaboration all along the value chain.

New business models are needed if car makers and suppliers (includingsemiconductor companies) are to master the challenges they currentlyface. These new business models must aim to translate innovation intovolume production at reasonable system cost. But they must also seek tokeep system complexity manageable, to master the art of developing newproducts under stiff time and cost pressure, and at the same time to upholdstrict quality standards. Forward-looking models will forge value chainsthat are based on partnership. Performance and reward will be wellbalanced. Business models that focus solely on price should thereforesoon be a thing of the past. After all, innovation is only affordable in thelong run if the inherent costs are not always being passed along to theprevious link in the chain.

This being the case, the central issue is to define who foots the devel-opment bill, especially for software projects. In future, software will bemuch more than just an extra bit tacked onto the hardware. It will increas-ingly establish itself as a separate product. Car makers have repeatedlycalled on the semiconductor industry to put more effort into this area. Thegrowing importance of software and moves to define a standardizedsoftware architecture will naturally have consequences for semiconductorfirms. The latter will thus have no choice but to tackle the issue of co-designing hardware and software head on. Even so, it is unlikely thatsemiconductor manufacturers will cultivate application-specific softwareexpertise as a new core competence. For one thing, this would run counterto the interests of first-tier suppliers. For another, it would be difficult forsemiconductor companies to market this competence in any sensible way.In the long term, these companies will therefore only contribute softwarein the form of hardware-related software (that is, firmware).

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Innovation must nevertheless be made possible in future, despite thesystemic differences in innovation and product lifecycles between theautomotive and semiconductor industries. To make sure this happens,durable standards must be fashioned, components must be made availablefor longer periods, and the entire product lifecycle – from start-up throughmodification to discontinuation – must be accompanied by intensivecommunication. At the same time, new approaches to financing and riskmanagement must be discussed and clarified. Networked organizations,mergers or collaborative ventures between selected partners would, forexample, be conceivable options. The important thing is that every partyto the automotive value chain must identify and concentrate on its owncore competencies. For their part, car makers should advance the devel-opment of open standards, ramp up their in-house integration skills andprovide the support that their partners need. In return, suppliers canposition themselves as reliable system partners, contributing stable,scaleable and innovative solutions.

Networked, strategic system and development partnerships with a long-term horizon are the key to future success. Within these partnerships,suppliers will do far more than merely deliver components at the lowestpossible cost. They will rather be treated as equal partners who areinvolved from the earliest stages of the auto maker’s entire development


Figure 12.10 Changes in the value chain

process. When these different players cooperate across the entire valuechain, the car companies can assume responsibility for the system as awhole, for drawing up specifications and coordinating the varioussuppliers. System suppliers can shoulder responsibility for integrating theapplications they deliver, while semiconductor firms such as Infineon cantake care of integrating their chips. Substantial synergies can be derivedfrom this approach to innovation – synergies from which everyone whoplays a part in the value chain will benefit. Ultimately, the resultantsavings will also help underwrite the cost of innovation.

For all the efforts already in progress, there are still far more questionsthan answers about how solutions that satisfy all players can be found tothe challenges raised by automotive electronics. It is, for instance, inter-esting to ask why the automotive electronics market is so fiercelycontested despite such immense challenges. System suppliers, componentsuppliers and semiconductor companies alike are all stepping up theiractivities in this market. Although the automobile market as a whole isunlikely to expand by more than a modest 3 per cent per year, one reasonfor such keen interest is undoubtedly the expectation of significantlystronger growth in automotive electronics. The market for automotivesemiconductor applications, say, is forecast to grow by an average ofaround 7 per cent per year between 2005 and 2010 (see Figure 12.11).

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4,919

7,806

10,920

14,4276,724

8,940

0

1 0 ,0 0 0

2 0 ,0 0 0

3 0 ,0 0 0

4 0 ,0 0 0

5 0 ,0 0 0

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2,5953,994

5,265

7,0833,150

3,935

0

1 0 ,0 0 0

2 0 ,0 0 0

3 0 ,0 0 0

2 0 0 5 2 0 1 0

Worldwide market for automotiveelectronics (US$ million)

Worldwide market for automotive semiconductors (US$ million)

7.8% CAGR

7.2% CAGR

Infotainment

Body +chassis

Safety

Powertrain

Infotainment

Body +chassis

Safety

Powertrain142511

13,65710,655

,43,

Figure 12.11 Market developments in automotive electronics andsemiconductorsSource: Strategy Analytics, October 2004, August 2005

Thanks to its in-depth knowledge of applications, its broad productportfolio and an appropriate corporate structure, Infineon is well placed torise to the challenges issued by car makers. It should therefore benefitfrom this growth as it draws on in-house knowledge in areas such ascommunications, safety/security and storage products.

Innovation remains the driving force behind the German automotiveindustry. The comparative competitive advantage enjoyed by Germanauto makers is in large measure attributable to their innovative prowess. Itis also true that the whole world looks up to the German car industry as the‘most efficient innovator’. However, whilst striving to escape from theproductivity vice, Germany must take great care not to forfeit its compet-itive advantage to emerging economies such as China and Korea. It canonly defend – and capitalize on – its position if car makers, systemsuppliers and component manufacturers all pull together.


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12

The next evolutionary stepfor the automotive industryis just around the corner:factors for sustainablesuccess in the interplay ofOEMs and suppliersSiegfried Wolf, CEO, Magna International

INTRODUCTION

The automotive world is changing at a rapid speed. The demands ofconsumers are becoming ever more differentiated. Their demand formobility is increasing, and development and production cycles areshortening dramatically. Globalization has intensified the speed ofchange even more. While auto makers open up new niche markets, newcompetitors are pushing into the market. In addition, record price levelsfor raw materials are driving up costs and demanding ever more effi-cient development and production practices. In parallel, hedge fundshave discovered an industry traditionally of little attraction to them,probing acquisitions which only a few years ago would have beenunthinkable.

Despite these far-reaching processes of change, the automotive industryis, without any qualifications, one of the key industries of the global

economy. A high-tech industry with an enormous potential for innovation,it has fascinated people from childhood. The millions of people visitingautomobile shows around the globe provide a glimpse of the fascinationthe automotive world exercises on humankind. Like hardly any otherindustry, the automotive industry is linked to strong emotions.Automobiles are an important part of our daily life. The continuouslygrowing societal need for mobility becomes manifest in them, and theyhave increasingly come to reflect people’s personality. Thus, automobilesepitomize the desire for individuality like hardly any other product. In anutshell, car buyers like to create a ‘home on four wheels’ for themselves.

‘The automobile’ apparently has not lost any of its fascination over theyears. Experts are saying that the automobile will remain the mostimportant means of passenger transportation in the future. We can antic-ipate that the fascination for automobiles will not fade – quite the opposite.

The future of the automotive industry, though, is anything but clear.Over the first years of the new millennium, sales have been slow. As aresult, the pressure for profitability has increased on all originalequipment manufacturers (OEMs). The industry is faced with enormousstructural changes which raise new questions about its value chain. Themarket entry of Japanese and Korean auto makers about 20 years ago hasalready led to fundamental changes in competitive and market conditions.More change is to be expected through the market entry of ChineseOEMs, especially in Europe. For the auto makers, at the beginning of thenew century, new competition has set in which has already reached newlevels, but has not yet reached its peak.

It is interesting to note that in the context of structural change processes,once again the impetus to define value chains anew has originated withinthe industry itself. The far-reaching restructuring processes of the 1990swere themselves initiated from within the automotive industry, so part ofthe automotive world’s fascination is apparently in its nature to constantlychallenge things, to always want to improve things, and to understandchange as an opportunity for improvement. The quest for top performanceis particularly strong within the automotive industry, as several examplesin this volume demonstrate.

A ROLE MODEL FOR OTHER INDUSTRIES

There is hardly an industry that has influenced other branches of theeconomy more strongly than the automotive industry. Particularly for theproduction of consumer goods, auto makers have set benchmarks and

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established a new way of thinking. The restructuring of value chains thatthe automotive industry implemented over the 1990s – keywords being‘lean production’ and ‘kaizen’ – is increasingly taking place in otherindustries as well. Mostly driven by globalization, many enterprises invery different industries see themselves forced to question their self-conception and to turn the organization of their processes on its head inorder to be capable of a top-level performance in future. In the wake ofthese changes, vertical integration is often reduced, entire productionchains are chopped off, and operations and workflows are designedcompletely anew to enable ‘just-in-time’ scenarios.

Take the banking industry as an example. The increased intensity ofcompetition among financial service providers is forcing open the tradi-tional value chains. To increase their profitability in international compe-tition, more and more financial institutions – in cooperation withspecialized service providers – are beginning to separate their primary(core) processes like sales and product development from secondary (non-core) processes like order fulfilment. According to industry experts, thesesecondary processes are especially characterized by fragmented work-flows which can be made substantially more flexible. Thus, the thinkingwithin the financial services industry strongly reminds us of the auto-motive industry of the 1990s. Even more: the auto industry has become arole model for other industries.

Look at retailing for another example where concepts from the autoindustry are finding their way into another industry. According to aMcKinsey study, the retail industry, particularly in Germany, aims toincrease its profitability through more efficient process management.Under the keyword of ‘lean retailing’, the complete supply chain from themanufacturer to the shelf is being reconsidered. Simplified processes arebeing introduced to ensure that goods get to the customer more quickly,that expensive stock levels are lowered, and that retailers have more timefor service activities.

CURRENT CHALLENGES IN THE INTERPLAY OFAUTO MAKERS AND THEIR SUPPLIERS

One way in which auto makers are increasingly dealing with the chal-lenges briefly sketched out above is through alliances. Recently, Porsche’staking a financial stake in Volkswagen has received a lot of attention. On amore operational level, the two auto makers have been long cooperating,

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for example on the shared architecture of the Porsche Cayenne andVolkswagen Touareg. The list of strategic cooperations could easily beextended: Toyota and PSA Peugeot-Citroën have entered a manufacturingjoint venture, and Ford and VW have been cooperating since the 1990s.General Motors, DaimlerChrysler, and BMW have formed an alliance todevelop and build hybrid drive systems.

The rising number of strategic alliances, experts agree, is caused by theincreasing fragmentation of markets. A smaller volume per model, andproliferation in the number of models, increase development andproduction cost per model. In addition, overcapacities have increasedpressure on margins, while innovation and the integration of new tech-nology into the production process is demanding ever more resources.OEMs accordingly use strategic alliances as well as modularizationconcepts to reduce one-off costs.

There is yet another reason that alliances have a positive effect: the will-ingness of OEMs to form alliances with their immediate competitorsshows that – notwithstanding their competition with each other, which isgood and necessary – a desire to do the best for the entire industry entersinto their considerations. Behind this is the simple but accurate insightthat the perspective of an individual OEM is improved if there are jointefforts to increase the global competitiveness of the entire industry.

Accelerated by globalization, the need to lower costs in general anddevelopment costs in particular, along with a need for higher flexibility,have long been influencing not only auto makers, but increasinglysuppliers as well.

Many suppliers in North America and Europe, especially medium-sizedones, are therefore in a precarious situation. Besides pressure on theircosts and margins, and development risks passed on to them by the OEMs,rising prices for raw materials burden the suppliers. They find themselvesin what might be called a sandwich position: from above they experiencethe OEM cost pressure, and from below they are pushed by exploding rawmaterial prices. What remains is the filling in this sandwich, which formany suppliers has become so thin that you can hardly see it any longer,only smell it at best.

Some experts forecast that another round of cost pressure would meanthe end for many smaller companies.

Just how serious the situation of the supplier industry is can also beseen from the rising number of insolvencies, which does not spare largecorporations. Even an industry giant like Delphi had to file for Chapter11 protection for its North American operations in October 2005. Onlythe future can tell what this will mean for its 185,000 employees, andwhat the consequences are for the North American market. At the same


time, the example of Delphi demonstrates the enormous dynamic ofchanges, and this leads to the question what factors lead to success in themarket under these conditions.

MAGNA: AN EXAMPLE OF SUSTAINABLEGROWTH IN THE SUPPLIER SECTOR

The case of Magna International shows that those suppliers that havemoved ahead of the competition, have recognized future challenges earlyon and have positioned themselves accordingly, can survive and eventhrive in this environment. Suppliers that aligned themselves strategicallyalong the requirements of ‘lean management’ during what some havereferred to as ‘the second automotive revolution’ in the 1990s arenowadays profiting from the structural changes in the industry.

At the same time OEMs reduced their level of vertical integration,starting a strong trend of outsourcing. Those supplier companies that didnot reduce their role to that of an ‘extended workbench’, but developedinto real production and became engineering partners of the auto makers,have fared best under these circumstances. But these suppliers also had tounderstand the needs and problems of OEMs, and to have the know-howto proactively offer new products and services.

Generally, a consistent focus on the needs and desires of customers is akey factor for success in the supplier industry. At Magna, this thinking isdeeply rooted and can easily be illustrated: when a customer says ‘Jump!’,the Magna response is not ‘Why?’, but ‘How high?’ Behind this is thesimple but absolutely correct insight that a supplier company can ulti-mately only be as successful as the customers it is allowed to serve.

Another aspect is certainly technological competence. A company thathas identified which technologies will prevail in the market, and thatmasters and further develops these technologies, can offer its customerssolutions that put them in a particularly promising position comparedwith their competitors. Take all-wheel drive technology for an example,which Magna has developed to create a decisive competitive advantagefor itself in drivetrain technology. Magna could offer its OEM customersa specific know-how which the final customers increasingly demanded.This ability to take extend its thinking to the final customer – or to put itdifferently, its customers’ customers – distinguishes Magna from manyof its competitors.

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MAGNA TODAY

Over the past years, Magna has grown very dynamically in both quanti-tative and qualitative ways. In this context, the acquisition of Steyr-Daimler-Puch in 1998 was certainly a special milestone. Besidesincreasing sales, through this acquisition Magna entered a newdimension within the auto supplier industry. It added complete vehiclecompetence, which meant that Magna was now accepted by OEMs as afully fledged engineering and manufacturing partner. Comprehensiveknow-how, in combination with a very broad and high-quality productportfolio, along with a global footprint, really do mark unique sellingpropositions.

Based on this, in 2004 Magna accomplished another jump in sales.Magna Steyr contributed substantially to this by increasing its completevehicle production from 118,000 units in 2003 to 227,000 units in2004, thereby doubling sales and almost tripling earnings beforeincome and tax (EBIT).

With sales of US $20.7 billion, about 83,000 employees, and 279 facilities(223 manufacturing, 56 engineering) in 23 countries, Magna now is theworld’s third largest automotive supplier.


Figure 12.1 Magna International: sales development

MILESTONES OF CORPORATE DEVELOPMENT

The success of Magna over the past decades is closely linked to FrankStronach’s name. In 1957, Frank Stronach opened a one-man tool and dieshop called Multimatic. In 1969, Multimatic merged with MagnaElectronics Corporation Ltd, and in 1973 the company name was changedto Magna International Inc. In the years that followed, Frank Stronach ledthe rapidly growing company to the top and – partly through systematicacquisitions – built Magna into the global corporation it is today.

From a strategic perspective, the various acquisitions were undertakento strengthen Magna in terms of technology. Over the years, new andspecific competencies have continuously been integrated into thecorporate network. As a result, the knowledge about automobiles withinthe company increased steadily. Magna has thus developed more andmore into an outsourcing partner of the most important OEMs.

Following the successful establishment of the company in North America,which was mainly achieved through organic growth, in the late 1980s Magnaturned increasingly to the European market. Over the following years andsupported by acquisitions, Magna achieved a similarly market-leadingposition in Europe. A milestone in developing the European market was theacquisition of what was then Steyr-Daimler-Puch AG in 1998, which was thecornerstone for Magna Steyr when it was formed in 2001.

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Figure 12.2 Magna’s global presence

Other groups also expanded their presence in Europe, step by step,partly through greenfield plants, partly by acquisitions intended toenhance and top off their product portfolio. It is noteworthy in this contextthat Magna’s rapid growth was occurring in a market that was consideredrather saturated when Magna entered it.

So much for history. But – and this is the decisive question – what haveFrank Stronach and Magna done differently from the competition? Or toput it differently, what are the decisive criteria on which OEM customershave increasingly opted for Magna as their supplier partner?

A central aspect in answering this question, besides the strategic acqui-sitions policy already discussed, is flexibility. Over the years, FrankStronach has built up an organizational structure that to this day allows fora maximum of flexibility. For Magna the ideas of lean management havenever been a management tool which was implemented, but rather part ofthe organization’s basic convictions.

The degrees of freedom resulting from this enabled Magna from thestart to focus fully on the needs and desires of its customers, instead ofdealing with a high level of internal complexity. At the same time, itsflexible structure allowed Magna to pick up new challenges and trendsmore quickly than its competition, and implement them according tocustomer requirements, before they became common knowledge in theindustry. Paired with growing technological competence, this enabledMagna to capitalize on a special momentum in many business decisions.

Frank Stronach has always relied on the power and the will of hisemployees to perform. This employee orientation still is a basic value ofMagna, and is documented clearly in the corporate constitution.

SUCCESS FACTORS FOR CONTINUEDGROWTH

One of the key reasons for the dynamic growth of Magna over the pastyear is the company’s ability to identify changes in the automotiveindustry early on, and to align itself to the new market conditions. Magnaimplemented the guidelines of the lean management principle long beforethey became common knowledge. In parallel, the flexibility of allbusiness processes was supported by a decentralized organizationalstructure. In addition, the actively driven enhancement of the portfoliothrough targeted acquisitions that was described above has strengthenedthe technological positioning of the company.


Over the course of the dynamic growth process, Magna succeeded inmaintaining the core principles and values of the company – somethingmany companies have failed to accomplish. Moreover, the distinctive entre-preneurial culture was transferred to the new added business units. In theprocess, Magna’s strong ability to integrate the newly acquired units ensuredits success and allowed for fast synergies between the various units.

Success factor: active portfolio management

The targeted acquisition policy and the sustainable, profitable growth ofthe past years have made Magna one of the leading global suppliers ofsystems, components and complete modules for the automotive industry.With regard to the range of products and services, Magna in its currentgroup structure – Magna Steyr, Magna Powertrain, Cosma, MagnaDonnelly, Decoma, Intier Automotive Interiors, Intier AutomotiveSeating and Magna Closures – has become the most diversified autosupplier in the world. The product portfolio that Magna can offer itscustomers ranges from small components to larger modules to complexsystems, all the way to a complete vehicle built on a contract assemblybase by Magna Steyr at the Graz facility.

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Figure 12.3 Magna International Group Structure 2005

Its complete vehicle competence has raised Magna to a new level andcreated an exceptional competitive advantage. Major projects like theSaab 9–3 Convertible, the BMW X3 and the Jeep Grand Cherokee areproof of the high acceptance Magna Steyr has received for its completevehicle know-how. In 2004 Magna Steyr built more than 227,000vehicles, a sixfold volume increase over 1998. A former low-volumemanufacturer has thus become the world’s largest auto maker without abrand of its own. In the process, the number of employees increased from5,000 to about 10,000.

Magna’s all-wheel drive and powertrain competence is organizedwithin Magna Powertrain. Here, Magna is a worldwide leader in tech-nology. There is hardly an all-wheel drive vehicle in the premium segmentthat does not utilize all-wheel drive know-how from Magna Powertrain.With the acquisition of New Venture Gear and the integration of what waspreviously Magna’s Tesma group, one of the worldwide leading power-train specialists has emerged.

Cosma is the worldwide largest supplier of metal body systems in theauto supplier industry. Its product portfolio ranges from small stampingsto structural parts and assemblies and large Class A stampings, all the wayto complete bodies-in-white.

The Magna Donnelly group, which specializes in mirror systems andelectronics, is also the market leader in its business field. Products byMagna Donnelly find their way into more than half of all vehiclesproduced worldwide. In the booming Chinese market, Magna Donnellyhas a market share of about 80 per cent, and about every third mirroractuator is made by Magna Donnelly.

Magna’s exteriors group is Decoma. As a supplier of completevehicle exteriors, Decoma has a leading position in the market. Itsproduct portfolio ranges from exterior trim components to bumpers,lighting systems, body side panels, and from tailgates to complete frontand rear end modules.

Intier Automotive Interiors covers the entire vehicle interior, itsportfolio spanning from complete dashboard systems to side andoverhead trim, floor carpets and acoustic systems, to complete vehicleinterior integration.

The focus of Intier Automotive Seating is on the development andmanufacturing of vehicle seats, complete seating systems and seatingmechanisms.

The business fields of Magna Closures are latching systems, electricaland mechanical window regulators, actuators and mechanisms for doorsand tailgates.


Success factor: decentralized organizational structure

The far-reaching changes in the auto industry have made flexibility amore and more important factor over the past few years. The changes inglobal markets, the dynamics of which will only increase in future, call fororganizational structures that allow enterprises to react quickly to newmarket challenges. The ability to satisfy the needs and expectations ofcustomers within a very short timeframe has become an importantcriterion for a company in setting itself apart from the competition. Thiscan mean being extraordinarily fast in certain development processes, orachieving the necessary capacity shifts smoothly.

To ensure a maximum level of flexibility in engineering and manufac-turing, Magna has been set up in a decentralized structure. This structurealso is the most visible element of Magna’s special corporate culture:Magna is not structured like a typical large corporation, with its often verystatic and strict hierarchic architecture. Instead, the company consists ofmany smaller units. The groups are typically made up of individual divi-sions whose size is normally limited to 300 to 800 employees. If a unit hasgrown dynamically and exceeds a certain size, it is usually divided intosmaller units again to allow specialization and a focus on its core compe-tences. In their daily business, individual divisions operate with a highlevel of autonomy and self-organization. On the market, they appear asprofit centres. This set-up guarantees each division and its management amaximum of personal freedom. This degree of freedom is what makesMagna an attractive employer for capable and performance-mindedheads. The decentralized structure thus has a substantial role in the ‘warfor talent’ as well.

One up from the divisions are the product groups, which organizeoverall back-office functions in group offices, which are always kept verylean. The groups also coordinate the individual divisions with regard tomarketing and eventually operational synergies.

Magna itself, steered by the Magna Executive Management, providesthe long-term strategic direction and takes care of financial, but alsotechnological and systemic synergies – like a large umbrella spanning alot of medium-sized companies. The corporate roof dictates andensures a high level of customer focus, so Magna always shows ‘oneface to the customer’.

Despite its size, Magna is thus nothing like a cumbersome supertanker.Instead, the company shows more characteristics of an alliance of smalland agile speedboats, manoeuvring highly flexibly and still using theforce of the alliance.

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Success factor: entrepreneurship

Because of the changed market situation, high margin and cost pressureand increasing competition, many companies in the automotive industry –suppliers as well as OEMs – have started efficiency improvementprogrammes again and again over the past years and decades. Often, theseprogrammes were limited to cost savings only, and in retrospect theyfailed to fully achieve the desired effects. While short-time recoverieswere visible, the second and third rounds of many efficiency improvementprogrammes indicate that the progress made was not sustainable.

One reason for the limited effectiveness is certainly the fact that withinthe company, such efficiency improvement programmes are experiencednegatively, as they are normally linked to severe cuts. In addition, manyapproaches are falling short of their goals, as they focus on the conse-quences of problems, but do not go to their source. In a way, these kind ofmeasures are always late and seem to be implemented with verylukewarm motivation.

Magna, in contrast, has a system-active programme to consistently raiseprofitability. This programme is barely visible to the outside, but of signif-icant importance for the positive performance of the past years, as is the


Figure 12.4 Magna’s decentralized structure

company’s decentralized structure: at Magna, there is a particularly strongentrepreneurial culture established over many years. Magna employees onall levels take care that the company advances and that useless jetsam isnot generated. This way of entrepreneurial thinking is supported by asystem of profit sharing which has proven itself over decades. With itsclear commitment to its employees, Magna has an avant-garde functionwithin the industry.

Magna has intentionally been set up and managed as a stakeholder-oriented enterprise over the years. At its centre are investors, employees,management and society. To ensure that the stakeholders, particularly theemployees, share in the positive development of the company, Magna hasa corporate constitution which exactly predetermines the percentage ofprofits shared by employees or given to social causes. The transparencyand the binding character of the corporate constitution make it a rolemodel not only within the auto supplier industry, and guarantee that thekey stakeholders are all partners in Magna’s growth and profitability.

Driven by the conviction that it is the employees in all areas of thecompany who determine the success or failure of the entire enterprise,through their qualifications, motivation and passion, Magna’s constitutioncontains a particularly high social component. In comparison with manycompetitors, this is certainly an important differentiator. The system,which at Magna also is referred to as ‘fair enterprise’, ensures theconstructive cooperation of management and employees. In a very trans-parent manner, it also ensures that all employees are interested in a goodperformance, as they directly participate in the company’s profitability.

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10%20%

6%

7%

2%

55%Steuern &

Re-Investition

Figure 12.5 Magna’s corporate constitution

MAGNA’S CORPORATE CONSTITUTION

The Magna corporate constitution defines and describes the central rightsof employees and shareholders. At the same time, it regulates the distri-bution of profits.

In terms of shareholder profit participation, the constitution deter-mines that investors receive on average not less than 20 per cent ofMagna’s annual net profit after tax.

A core element of the specific Magna culture is employee equity andprofit participation. This participation, which is laid down in thecorporate constitution, fosters entrepreneurial thinking and therebyhelps reduce inefficiencies. Employees become partial owners andentrepreneurs within the company. That way, they have a very individualinterest in offering customers innovative and high-quality solutions,while at the same time holding down costs. With regard to employeeequity and profit participation, the constitution provides that 10 per centof Magna’s qualifying profit before tax will be allocated to employees.These funds are used in part for the purchase of Magna shares in trust foremployees, and in part for cash distributions to employees, recognizingtheir length of service.

To obtain long-term contractual commitment from senior management,the constitution also determines management profit participation.Thereby, Magna provides a compensation arrangement which, in additionto a base salary below industry standards, allows for the distribution of upto 6 per cent of its profit before tax.

To ensure its long-term and sustainable success and to warrant acontinuous innovation process, the constitution spells out that Magna willallocate a minimum of 7 per cent of its profit before tax for research anddevelopment. This can be interpreted as an indicator how strongly Magnahas committed to adding value to its customers through continuousproduct and process innovations.

As mentioned above, social responsibility is a fundamental principleof Magna. To comply with this, Magna allocates a maximum of 2 per centof its profit before tax for charitable, cultural, educational and politicalpurposes to support the basic fabric of society.

In addition, the constitution requires management to produce a profit.The minimum profit performance can be interpreted as an essentialcontribution to secure the company’s long-term viability. If Magna doesnot generate a minimum after-tax return of 4 per cent on share capital fortwo consecutive years, Magna’s Class A shareholders, voting as a class,have the right to elect additional directors.


To ensure investment is geared to supporting the company’s targets,Magna Class A and Class B shareholders, with each class voting sepa-rately, have the right to approve any investment in an unrelated business inthe event that such an investment, together with all other investments inunrelated businesses, exceeds 20 per cent of Magna’s equity.

Finally, the constitution also governs the composition of the board ofdirectors. As Magna believes that outside directors provide independentcounsel and discipline, a majority of the members of Magna’s board ofdirectors are required to be outsiders.

THE MAGNA EMPLOYEES’ CHARTER

Inseparable from Magna’s corporate constitution is the Magnaemployees’ charter. The charter clearly defines Magna’s commitment toan operating philosophy that is based on fairness and concern for people.

Some of the key elements of the employees’charter illustrate how Magnasucceeds in ensuring its distinct entrepreneurial culture over the long term.Magna realizes that the best way to enhance job security is to produce a

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Job security

A safe and healthyworkplace

Competitive wagesand benefits

Communicationand information

Fair treatment

Employee equity andprofit participation

Hotline

Figure 12.6 Magna’s employees’charter

quality product at a competitive price. The prerequisite for this is the appro-priate training and retraining of employees. To encourage individual qualifi-cations and to expand the knowledge network within the company, Magnatherefore offers special programmes for human resource development.These include counselling on future professional development; specifictraining programmes tailored to individual interests and capabilities; andassistance in establishing contact with external institutions.

A further aspect in this context is the company’s open communicationand information policy. Through a consistent and company-wide opendoor policy, Magna encourages communication within the company andcreates a positive climate for cross-group cooperation.

An instrument like the Magna employees’ charter will only show aneffect if it is more than lip service. An employee opinion survey guar-antees that these principles are adhered to within the divisions and thatmanagement is upholding them. All employees are surveyed regularlyevery 12 to 16 months using a standardized system. The results of theemployee opinion survey directly become part of management evaluationby Magna’s top executives. They quickly lead to specific action plans tosolve the problems pointed out in the survey.

SUCCESS FACTORS TAKEN TOGETHER:OPERATING PRINCIPLES

The corporate constitution and Magna’s employees’ charter ensure thatthe ‘fair enterprise’ principle is not just a theoretical approach, but isrealized by management and employees alike on a day-to-day basis. Thenotion of an ‘entrepreneur within the enterprise’ is therefore particularlyappropriate for Magna employees. The decentralized organization of thecompany in largely independent profit centres creates the necessarydegrees of freedom, reduces administrative expenses and allows for anexceptional closeness to customers. Individual employees within the rela-tively small and flexible units can be integrated more easily into entrepre-neurial responsibilities. This substantially increases employees’ owninitiative, in particular in terms of internal efficiency.

Allocating 10 per cent of Magna’s qualifying profit before tax toemployees further strengthens this way of thinking, as performance,quality and efficiency are directly rewarded. Thus the better the qualityMagna can offer its customers and the more cost-efficiently this qualitycan be achieved, the bigger the allocation.


Magna has positioned itself in a way that brings performance andcompensation into a fair balance and establishes lean managementthroughout the company. The dynamic growth over the past decades –often enough in contrast to the general trend of the industry – proves thevalidity of Magna’s basic principles, and shows that entrepreneurialsuccess and fair cooperation between management and employees do notexclude one another.

LOOKING AHEAD: THE FUTURE OF THE INDUSTRY

When looking into the future of the automotive supplier industry, we canidentify four important trends. First, many indicators suggest that in futurethose companies that continuously achieve top performances will beahead of the competition. This is not only about cost leadership, but moregenerally about the interplay of cost and quality, which must beconsidered together. Moreover, a consolidation in the supplier industrywill result in performance levels being taken to a new height. The auto-motive industry will thus remain an industry characterized by topperformance, not merely in terms of technology.

Second, there are many signs that outsourcing on the part of OEMs willcontinue. Industry experts estimate that, by 2015, some 77 per cent of thevalue will come from suppliers. This is closely related to the efficiencyimprovement programmes of the OEMs, as well as the steadily growingmodel diversity.

The third important trend in the automotive industry suggests that thequantity and complexity of engineering projects handled by suppliers willincrease further. This results, among other things, in a greater need forfinancing. To remain competitive in future, many suppliers will continuesalong their path of relocating manufacturing to countries with lowerproduction costs. Whether these relocations are associated with a differentlevel of quality, or whether they will turn out to be the expected success atall, remains to be seen case by case.

The fourth trend is imminent when the focus of analysis shifts to thedevelopment of the global markets. The weight of Asia and particularlyChina, as well as that of Eastern European markets, will grow in future.China will further develop its position as a low-cost production base aswell as a sales market in worldwide competition over the next few years.

In summary, the following four trends can be confirmed:

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� The automotive industry will remain an industry of (technological) topperformance.

� Outsourcing processes at OEMs will continue.� The complexity of development processes at suppliers will grow.� The markets in Eastern Europe and Asia will gain further weight in the

global competition.

THE CORNERSTONES OF MAGNA’S GROWTHSTRATEGY

To continue the successful course of the past years in the light of thesenew developments, Magna holds on steadily to a step-by-step strategy ofdisciplined, profitable and self-financed growth. On an operational level,Magna is following four strategic directions:


Figure 12.7 Strategy for further growth

Continuously broaden the customer base

As a tier 1 supplier, Magna naturally offers its broad product portfolio toall OEMs. In so doing, Magna responds to the noticeable willingness ofOEMs to share certain competencies and to capitalize on developmentpartnerships in their non-core business. In future, Magna will use thesynergies between its groups even more strongly to establish itself as aqualified value-adding partner and win new customers. In this regard, theFrench and Asian OEMs have a high priority.

Develop new markets

More than 100 Magna facilities (manufacturing and R&D) are located inEurope, and more than 150 facilities are in the NAFTA region. Thecompany is currently present in Asia, with more than 10 manufacturingand R&D facilities.

In future, Magna will focus on following its OEM customers into newgrowth markets. Of particular interest in this regard are the emergingmarkets in Eastern Europe and China. To make the most of these newpotentials, Magna is extending its activities into these growth markets stepby step and consistently. New customer portals in Seoul and Shanghaihave been set up, and capacities at the plants in China and Eastern Europeare gradually being expanded. Every step into these new markets alwaysfollows the principle of disciplined, profitable and self-financed growth.

In parallel, Magna continues to align its capacities in North Americaand Europe to customer needs, and to expand them if needed. As always atMagna, growth means ‘in addition to’, and not ‘instead of’.

Innovations and technological progress

With over 5,000 employees in research, development and engineering,Magna counts among the biggest and most capable engineering serviceproviders in the auto supplier industry. In future, Magna will furtherexpand its role as a driver of innovation within the automotive industry,and support OEMs in managing increasing complexity and technologicalchallenges. To this end, Magna will employ its competencies across thecomplete vehicle, to proactively offer its OEM customers responses tofuture technological requirements, new legislative regulations andsocietal trends. The scope of services ranges from the concept idea, to all

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phases of product, programme and process engineering, to testing andhomologation.

Its complete vehicle competence enables Magna to support auto makersnot only on parts or system engineering, but also – if needed – in the engi-neering and manufacturing of the complete vehicle.

Of key importance to Magna in this process is its highly skilled work-force. The best engineers and innovations are of little use if there is nohighly skilled workforce to translate new developments into high-qualityproducts quickly and in a cost-efficient manner. Thus, Magna has estab-lished comprehensive training programmes to ensure a ‘world-classmanufacturing’ quality level over the long term.

Some examples of innovation illustrate how Magna is playing a part inthe value chain of OEMs, always keeping in mind the needs of the finalcustomer, the vehicle driver. Decoma is developing a ‘composite intensivevehicle’ which will lower vehicle weight substantially, thereby enablingbetter vehicle handling and better mileage. Magna’s Intier Interiors group,based on its competencies in flat cable systems and integrated airbags, isworking to provide solutions for additional hidden load space, therebyfurther increasing comfort inside the vehicle. Magna Donnelly is pushingthe development of a camera-based park assist system, and Cosma isbuilding on its leading-edge know-how in the development and use oflight and high-strength steel to decrease vehicle weight and make vehiclessafer at the same time. Higher security at a lower weight translates intobetter mileage and lower insurance rates. At the 2005 Frankfurt MotorShow, Magna Steyr presented the MILA (Magna Innovative LightweightAuto) concept car, which showcases the group’s combined competencesin the shape of an impressive prototype. A range of technologies comestogether in the MILA concept (Figure 13.8): an eco-friendly CNG(compressed natural gas) powered engine combined with extremelysporty performance (150 HP, over 200 km/h top speed); a consistent light-weight construction; a modular design principle with components andmodules developed in advance and optimized in terms of cost and weight;and advanced vehicle safety thanks to the monocoque body’s highstiffness. Besides these ‘hard facts’ it is interesting to note the ‘soft fact’that it only took six months to completely develop and build the vehicle onshow, as all the development steps up to the complete concept vehiclewere modelled virtually.


Capitalizing on the ongoing trend of OEM outsourcing

According to several third-party studies, the need for technology part-nerships between suppliers and OEMs will increase further.Representatives of suppliers do not need to refer to these studies,though: their day-to-day talks with customers show that they expect evermore sophisticated and comprehensive solutions from their suppliers,and that they presuppose the necessary capabilities to be present at thesupplier. With its competences in development and manufacturing,Magna is positioned very well in both operational and strategic terms.The strongly growing model diversity and the rising share of nichevehicles in Europe as well as America and Asia open up excellent oppor-tunities for Magna to capitalize on this outsourcing trend and expand itsmarket position.

Of course, suppliers must not make the mistake of taking these opportu-nities for future business for granted. In the light of current tendencies toinsource, which – particularly in Germany – are partly motivated politi-cally, suppliers are called on to consistently prove to OEMs that they offereconomically and technologically superior alternatives.

This latter challenge is not limited to current programmes or specifiedsupply content, but can also relate to new business models and new formsof cooperation.

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Figure 12.8 Concept MILA

The concept of a ‘peak-shaving’ plant, as proposed by Magna Steyr, canbe interpreted as a sustainable business model for the future which estab-lishes this kind of technology partnership between OEM and supplier.

When we look at the production and sales volumes of various models anddifferent OEMs, it is clear that in order to cover production peaks – or forthe production of niche vehicles – capacities are required which are notneeded over the full product lifecycle.

Given that strongly varying volumes and inefficient capacity utilizationcause disproportionately high costs, Magna Steyr is currently indiscussion with several OEMs with regard to a so-called ‘peak-shaving’plant. Such a plant would be operated by an external partner – MagnaSteyr in this case – and become an integral part of OEM strategies forhandling peak levels of production.

The model presupposes that several OEMs would be willing to coop-erate with direct competitors, in order to generate a benefit for everyoneinvolved. The current change processes within the automotive industryand the growing readiness for strategic alliances are indications that thereis a strong potential for this business model.

The operator of this peak-shaving plant must be capable of buildingvery different vehicles in the same facility. Magna Steyr’s Graz plant isthe tried and tested role model of such a highly flexible factory (‘flexplant’). Graz currently builds seven different vehicles, each on a separateplatform, for five different brands, and within three very different OEM


ShortenedlifecyclesNew pricemechanismsServingadditionalniches

Figure 12.9 Peak shaving flex plantSource: McKinsey, 2004

worlds. It goes without saying that the specific brand characteristics foreach brand are maintained. Using the Magna Steyr Production System(MSPS) to bring the capabilities together and put them to work, MagnaSteyr presents itself to the OEMs as a qualified operator for that kind ofpeak-shaving plant.

CONCLUSION

The future of the automotive industry will be characterized by technologypartnerships at eye level, with suppliers increasingly moving from partssuppliers to module suppliers to systems integrators. This is another evolu-tionary step for the automotive industry. The rules of this game are not ‘bigbeats small’or ‘strong beats weak’, but rather ‘flexible beats inflexible’, ‘fastbeats slow’, and ‘open and willing to learn beats rigid and bureaucratic’.

Magna will expand its leading-edge competences in automotive tech-nology to continue setting the pace for technological progress within theindustry. In the interest of a positive evolution of the company and alasting improvement of its competitive position, this is a necessary step.

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Figure 12.10 Price-based competition versus strategic partnership

Price-based competition and strategic partnerships can be considered theend points of a scale within which there are several different stages(commodities – components – modules – systems – complete vehicles).The decision where a supplier positions itself on this scale is paramountfor the long-term perspective of the enterprise. For globally activesuppliers with a strong presence in the highly industrialized Westerncountries, the movement can only be towards becoming a strategic partnerfor OEMs. This means moving away from supplying commodities in aprice-based competition and with a high level of replaceability amongsuppliers, and moving towards innovative comprehensive solutions char-acterized by a lot of know-how and technological sophistication, wheresuppliers cannot arbitrarily be replaced. This position must be workedhard for, though, and it takes a clear decision on the strategic direction. Italso means the necessary resources in terms of personnel and structuresmust be put together, along with the innovative solutions with whichcustomers are approached proactively.

Magna has decided to follow that path. In so doing, the maxim for itsemployees will not change in future: ‘Producing a better product for abetter price!’


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13

BlueTec: the path to theworld’s cleanest dieselDr Thomas Weber, Member of the Board of Management,DaimlerChrysler AG

THE DIESEL DRIVE: A PAST AND FUTURESUCCESS STORY

The diesel engine is enjoying immense popularity. In Europe it hasachieved to date a market share of more than 50 per cent among newvehicles, and this trend – spurred by high fuel prices among other factors– is further on the rise. To give an example, a total of 7.2 million newdiesel vehicles were registered in Western Europe in 2005. The share ofdiesel-powered Mercedes-Benz passenger cars amounted to 54 per cent.But it is not only in Europe that the diesel drive expected to be headingtowards a promising future: various studies also detect great potential in‘new’ diesel markets, such as the United States. For the year 2012, JDPower forecasts that the diesel share will have at least doubled comparedwith 2005, so diesel should then account for 10 per cent of newly regis-tered vehicles in the United States.

TRADITION AND MODERN TIMES: THE ORIGINS OF THE DIESEL DRIVE

The history of the diesel engine is closely connected to the Mercedes-Benz brand and the Daimler-Benz company, both the passenger car and

truck divisions. Among the pioneers of the diesel engine is ProsperL’Orange, who as a member of the board of Benz & Cie AG developed theprechamber diesel engine and had the technology patented. A milestone inthe history of diesel engines was the first test drive with the first serial-production four-cylinder prechamber diesel engine in a road vehicle nearGaggenau on 10 September 1923. The engine delivered a performance of45 to 50 hp with 8.8 litres displacement, and was used for 5-tonne trucks.The great savings potential of diesel was already apparent during thesetest drives, and was noted down by the delighted development engineersas follows: ‘The fuel consumption is about 25 per cent lower than that ofour conventional, gasoline-powered trucks.’

At the Geneva Auto Show in 1932, Daimler-Benz presented the Lo2000 light truck, called ‘Schnell-Lastwagen’ (high-speed truck), whichwas equipped with the newly designed 3.8 litre prechamber diesel OM 59,and which triggered the large-scale breakthrough of the self-ignitionengine. The vehicle achieved sales figures of more than 13,000 units –stunning for that time.

It was easy to identify diesel-powered trucks from the outside as well:the word ‘diesel’ was displayed in large letters on the lower part of themighty Mercedes star. This pride was justified: Daimler-Benz had longsince taken on a leading role in the development of diesel engines.

Boosted by the success of the diesel engine in trucks and convinced bythe manifold advantages of the diesel engine over the gasoline engine,Mercedes-Benz was the first vehicle manufacturer to implement thediesel-combustion principle in a passenger car engine more than 70 yearsago. In the autumn of 1935, the first 170 diesel-powered passenger carstook to the streets. Almost all of them were taxicabs. One year later, 50years after the invention of the automobile and 44 years after RudolfDiesel had obtained the patent for his diesel engine, the first diesel-powered serial-production passenger car was presented to an amazedpublic in Berlin, in the form of the Mercedes-Benz 260 D. The four-cylinder diesel engine with 2.6 litres displacement yielded 45 hp and, withits five-bearing crankshaft, could effectively dampen vibrations. Thisallowed an engine speed of 3,200 revolutions per minute, so that expertssoon spoke in awe of the ‘high-speed engine’. The new and robust enginepermitted a maximum speed of 97 kilometres per hour (kph) (60.3 milesper hour) and only consumed between 9 and 11 litres of diesel oil per 100kilometres (26.1 to 21.4 miles per gallon). Hence a successful start wasmade to using diesel technology for passenger cars, and the way waspaved to further ground-breaking innovations.

In subsequent decades, further milestones followed. The Mercedes-Benz 180 D – better known as the ‘Diesel Ponton’– became the cab of the

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1950s par excellence, and the ‘Type 180’ could already win the compe-tition with gasoline engines in terms of sales figures. In 1971, themillionth diesel passenger car rolled off the assembly line inSindelfingen. Over the years, numerous records were set with Mercedes-Benz diesel passenger cars, and the diesel drive made huge progressespecially in terms of technology. In 1996, the first passenger car withdiesel direct injection was introduced, and 1997 saw a technologicalquantum leap with the introduction of common-rail direct injection(CDI) in combination with four-valve technology. Since then, the abbre-viation CDI – today available in its third generation with piezo-electricinjectors – is a symbol for both unrivalled fuel economy and enormoustorque boost – a synonym for high propulsion power, which guaranteeslots of driving pleasure and often gives diesel engines a competitive edgeover gasoline engines.

Until today, the essential advantage of the diesel engine over thegasoline engine was its clearly higher efficiency and the concomitantlower fuel consumption. Thus the diesel requires between 20 and 40 percent less fuel than a comparable gasoline engine. Over the years, thespecific disadvantages, such as the engine-power characteristics and thecreation of vibrations and noise, have been significantly improved with awhole range of technical innovations, such as first five-cylinder dieselengines and production-quality turbo-diesel engines.

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Figure 13.1 The first serial-production passenger car with diesel drive,the Mercededs-Benz 260 D

THE DIESEL ENGINE’S PATH TO LOWEMISSIONS

Emission regulations for diesel engines in passengercars

Apart from the clear boost in performance and the noticeably reduced fuelconsumption, the technological innovations also lead to a significantreduction in emissions. With today’s Mercedes-Benz C 220 CDI, forinstance, carbon-monoxide (CO) emissions are approximately 92 per centlower than those of the Mercedes-Benz 190 D 2.5 of 1993. Improvements,especially in the internal combustion process and the oxidation-typecatalytic converter, led to a substantial reduction in CO and hydrocarbonemissions. Through these improvements of the internal combustionprocess, it has been possible to reduce nitrogen oxides (NOx) emissionsby about 75 per cent within the last 15 years.

If the diesel engine still had any disadvantages over the gasoline engine,they were specific diesel-engine emissions, especially particulate matter(PM) and NOx. These two exhaust-gas components are an especial focusof various countries’ emission standards, which prescribe a continuousreduction in them over the years, to be implemented via successive stages.

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Figure 13.2 Emission reductions for the diesel engine, 1993–2004

The exact exhaust-gas limit values for the Euro-5 standard are currentlybeing discussed in the European Union, and a further reduction of the limitvalues for NO and PM prescribed in the Euro-4 standard can be expected.

For about a year now, the limit values for PM10 particulate matter havebecome an issue of increasing public awareness. This was triggered by theEU’s Clean Air Directive, which was transposed into German national lawin 2002. As a consequence of this regulation, some cities, such asStuttgart, will ban truck traffic from passing through, should the dailyaverage values exceed or approach the limit values. This especiallyconcerns high-traffic inner-city routes. Whether these measures will leadto sustainable success must be doubted, especially since various studieshave shown that, in Germany, road traffic only accounts for 25 per cent ofPM emissions.

A significant reduction in diesel particulate emissions and compliancewith future particle limit values could be achieved with the introduction ofthe service-free diesel particulate filter for diesel passenger cars in autumn2003. Since summer 2005, Mercedes-Benz has been offering service-freediesel particulate filters as standard equipment for all diesel vehicles inmany countries. NOx are the only remaining exhaust-gas component forwhich the diesel engine shows poorer values than the gasoline engine. ForNOx, which can lead to irritation of the respiratory system above a certainconcentration and which contribute to the creation of acid rain and the

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Figure 13.3 Emission limit values for diesel passenger cars in theEuropean Union, United States and Japan

formation of ozone, the strictest exhaust-gas limit values will be valid inthe United States and in particular in California starting in 2007.

Emission regulations for diesel engines in trucks

The same challenges in terms of NOx and diesel particle emissions existfor diesel-powered trucks. For these as well, legislators have prescribedthe continuous reduction of emissions over various steps. Starting inOctober 2006, the new exhaust-gas regulation Euro-4 will come intoforce in the European Union. It will serve to reduce the emission of NOxby about 75 per cent compared with the legal regulations of 1990. In afurther step, the Euro-5 standard will then lower the limit values for NOxagain from October 2009, an 85 per cent reduction of the limit valuecompared with the legal regulation of 1990. With both standards, theemission of soot particles will be reduced by approximately 98 per centcompared with 1990. In addition to the European exhaust-gas regula-tions, there are comparable emission regulations for trucks in the UnitedStates and Japan.

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Figure 13.4 Development and creators of particulate matter emissionsSource: Umweltbundesamt 2004

OUR STRATEGY: THE WORLD’S CLEANEST DIESEL

BLUETEC: modular technology for passenger cars

New solutions for the combustion process and new technologies for theafter-treatment of exhaust gases are required if diesel engines are to becompetitive in the future and to fulfil the requirements of the exhaust-gasstandards. It was already foreseeable that the strict future limit values forNOx could not be fulfilled through improvements in the internalcombustion process alone. We therefore decided early on to implementSCR (selective catalytic reduction) technology in order to neutralize theharmful NOx in the exhaust gas, and we can now present a solutionpackage for exhaust-gas after-treatment that enables us to comply with thestrictest emission limits worldwide.

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Figure 13.5 EU emission limit values for trucks

Three steps to the world’s cleanest passenger car diesel engineWe are pursuing the target of developing the world’s cleanest passengercar diesel engine without compromising on the driving pleasure andperformance provided by high-torque engines. To achieve an optimalbalance of the characteristics of the diesel engine, we are proceeding inthree steps:

� Step 1: We further optimize the internal combustion process and applyclean fuels to achieve the cleanest possible and most efficientcombustion, thus reducing the raw emissions to a minimum –upstream of any exhaust treatment system. This is achieved by a fine-tuned engine control, four-valve technology, third-generation CDIusing piezo injectors, a variable-geometry turbocharger and a high-precision exhaust-gas recirculation system.

� Step 2: An oxidation catalytic converter is used to minimize the emis-sions of CO and unburned hydrocarbons (HC). Nitrogen monoxide (NO)contained in the raw emissions is converted into nitrogen dioxide (NO2)by the oxidation catalytic converter, which however does not reduce thetotal amount of NOx. Subsequently, the particulate filter reduces theparticle emissions by up to 98 per cent – a level well below the Euro-4limit values, which also meets all applicable US emission standards.

� Step 3: The emission of NOx – the concentrations of which are higherin diesel engines than in gasoline engines as a consequence of thediesel design principle – will then be reduced to a level that ensurescompliance with the world’s strictest emission standards. At this point,the so-called BLUETEC technology is applied, using either a further-developed ‘DeNOx’ absorption-type catalytic converter or theAdBlue® injection principle. These technologies, in conjunction withthe SCR principle, are currently forged into the most effective methodof exhaust treatment, resulting in a reduction of NOx emissions of upto 80 per cent.

BLUETEC with AdBlue® injectionUsing its design principle, the diesel engine operates on a lean mixture: inother words, on a fuel/air ratio with an excess amount of oxygen. Thisoxidizing atmosphere however makes it very difficult to chemicallyreduce unwanted NOx and to convert them into harmless nitrogen bydeoxidation. The SCR process is based on the addition of the AdBlue®reductant into the exhaust system. This method is very effective, thoughtechnically demanding. AdBlue® is a hydrous urea solution stored in an

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on-board container which is injected into the pre-cleaned exhaust flow viaa metering valve. The exhaust’s thermal energy downgrades the injectedAdBlue® into ammonia (NH3), which then induces the reduction of theNOx into harmless nitrogen and water in the downstream SCR catalyticconverter. A high efficiency rate can only be achieved through an accurateadjustment of the injected reductant quantity to the operating conditionsof the engine, which is performed with the aid of a sensor at the end of theexhaust system. This process only requires approximately 0.1 litres per100 kilometres, and hence the storage tank of a passenger car will bedesigned to hold a sufficiently large quantity that it only needs to bereplenished during routine servicing. An electric heating system for thetank and the lines prevents the freeze-up of the AdBlue® solution andensures reliable system operation even at low ambient temperatures.

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Figure 13.6 Three steps to the world’s cleanest diesel

Figure 13.7 Technology package: BLUETEC with AdBlue® injection

BLUETEC with an advanced DeNOx catalytic converterAs an alternative principle to the BlueTec variant using AdBlue® toreduce NOx emissions, they can also be trapped in a so-called NOxadsorption-type catalyst, which retains the NOx during the normal lean-mixture operation of the diesel engine. A periodic short-term change to arich mixture and the corresponding excess of fuel in the fuel/air mixturethen creates reduction conditions in which the accumulated NOx areremoved. The catalytic converter is however subject to ageing, and itsefficiency in reducing NOx decreases in the process. A NOx adsorptioncatalyst by itself will hence not be able to comply with the increasinglystrict emission standards in the long term. One elegant solution is thecombination of an improved NOx adsorption catalytic converter(advanced DeNOx catalytic converter) with an SCR catalyst (withoutAdBlue® injection), which results in a new self-sufficient catalytic-converter system permitting an optimized operating strategy. The designand adjustment of the complete system requires careful consideration ofthe difficult interaction between the oxidation catalyst, advanced DeNOxcatalyst and SCR catalyst, and discontinuous engine operation with a leanand a rich mixture. An optimal adjustment of the system ensures that theregular change between lean and rich mixture operation does not affectengine performance and hence is not noticed by the driver. The result is asignificant improvement of the overall system efficiency and a partialcompensation for the effects of ageing.

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BLUETEC

Figure 13.8 Technology package: BLUETEC with advanced DeNOxcatalytic converter

THE FIRST SERIAL-PRODUCTION PASSENGERCAR: THE E 320 BLUETEC

We started our BLUETEC initiative for passenger cars in June 2005. Atthe Innovation Symposium in New York, the Mercedes-Benz bionic carwas the first vehicle worldwide to show how BLUETEC on the basis ofthe AdBlue® injection system can drastically reduce NOx emissions evenin a passenger car. Thanks to the oxidation-type catalytic converter andthe diesel particulate filter, the modern CDI engine with 103 kW/140 hpfalls significantly below the strict Euro-4 exhaust-gas limit values and atthe same time contributes immensely to improved fuel economy. In theNew European Driving Cycle (NEDC), the concept vehicle consumes 4.3litres of fuel per 100 kilometres (this corresponds to 54.7 mpg) – 20 percent less than a comparable serial-production model. US measuringprocedures (FTP 75) testify a fuel economy of about 70 miles per gallon,which lies about 30 per cent above the value of a serial-productionvehicle. At a constant speed of 90 kph, the direct-injection engineconsumes 2.8 litres of diesel fuel per 100 kilometres (this equals 84 mpg).

At the IAA (International Frankfurt Auto Show) 2005, the secondpassenger car to use this new technology followed, the concept vehicle S320 BLUETEC hybrid. It proved that this new technology is also feasiblein a large sedan. The concept vehicle showed how, in the near future, fuelconsumption and emissions can again be drastically reduced while highdynamic driving comfort is offered. The focus was on combining an opti-

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Figure 13.9 Mercedes-Benz bionic car study

mized diesel engine with the BLUETEC technology and a mild-hybridsystem. The electric motor which is integrated into the powertrain makesit possible to significantly reduce fuel consumption even more, especiallyin inner-city stop-and-go traffic. When coasting or braking, the electricmotor, working as an alternator, regenerates energy and can make use of itfor driving, when the combustion engine has switched off. The measuresimplemented on the combustion engine and the electric motor hencepermit a 20 per cent reduction in the fuel consumption of the S 320BLUETEC hybrid compared with the corresponding predecessor model.

At the North American International Auto Show in Detroit in January 2006,DaimlerChrysler presented further BLUETEC vehicles. In the Vision GL320 BLUETEC and the Jeep® Grand Cherokee BLUETEC concept vehicle,BLUETEC was implemented with the AdBlue® injection system. The twovehicles show that low fuel consumption and the lowest emissions are alsopossible with large sport utility vehicles (SUVs). With a consumption of 9.9litres per 100 kilometres (NEDC) (equalling 23.76 mpg), the Vision GL 320BLUETEC has the potential of being the most economical vehicle and, withBLUETEC, at the same time the cleanest diesel vehicle in this class.

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Figure 13.10 Vision S 320 BLUETEC hybrid

Figure 13.11 Vision GL 320 BLUETEC and Jeep® Grand CherokeeBLUETEC concept vehicle

The E 320 BLUETEC – also presented in Detroit – will be the first serialproduction passenger car with BLUETEC and will be offered, at first only inthe United States and Canada, from autumn 2006 onwards. The BLUETECserial production vehicle is the cleanest diesel vehicle the customer can buyworldwide and therefore has the potential of fulfilling the world’s strictestexhaust-gas limit values and hence also those of all 50 US states. A basicrequirement for the successful use of BLUETEC is the use of low-sulphurfuel with a sulphur content of less than 15 parts per million (ppm). This willbe available across the United States from autumn 2006.

The most recent concept vehicle, the Vision CLS 320 BLUETEC, waspresented in Geneva in the spring of 2006. With a fuel consumption of 7.9litres per 100 kilometres (NEDC) (29.77 mpg), the Vision CLS 320BLUETEC is also one of the most fuel-efficient and cleanest vehicles of itsclass. In contrast to the Vision GL 320 BLUETEC and the Concept VehicleJeep® Grand Cherokee BLUETEC, the E-Class and CLS-Class areequipped with the advanced DeNOx catalytic converter and the SCRcatalytic converter.

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Figure 13.12 The E 320 BLUETEC with advanced DeNOx catalyticconverter

Figure 13.13 The Vision CLS 320 BLUETEC

We are currently preparing this technology for worldwide use in thevarious models of our vehicle brands. Which BLUETEC variant will beimplemented depends on the specific market requirements, the drivingcycles and the vehicle design concept. To this end, the technology packagemust be adapted carefully to the specific external requirements. Europeanrequirements, for instance, differ entirely from those of the United States.The development activities for the European market focus on a maximumreduction in NOx emissions and adaptation to European driving profiles,as well as an implementation of the BLUETEC technology with as littleeffect on fuel consumption (and CO2 emissions) as possible. In 2008 at thelatest, we will offer BLUETEC in passenger cars in Europe.

On the road: BlueTec® in commercial vehicleapplications

We were the first commercial vehicle manufacturer to successfully offerthe BlueTec® exhaust treatment system with SCR technology andAdBlue® injection for commercial vehicles with a gross vehicle weightrating above 6 tonnes, which we did as early as the beginning of 2005.Since then, this technology has fully proven its worth in more than 14,000trucks of the Actros, Axor and Atego series. Already today, 96 per cent ofthese vehicles comply with the Euro-5 emission standards which willbecome effective in 2009.

Unlike passenger car owners, truck operators must refill the hydrousurea solution supply themselves at regular intervals. Despite frequentassertions to the contrary, the supply of AdBlue® is already ensured on abroad scale by 2,500 service stations across Europe, from the Arctic Circleto the south of Spain, and from Dublin to Moscow. As the AdBlue®consumption amounts to only 2 to 3 per cent of the total diesel fuelconsumption, a very long distance can be travelled with only one tank full,and there is hence little risk of running out of AdBlue® en route and notbeing able to refill in due course.

The BlueTec® diesel technology is essentially based on further-developed engines and the BlueTec® exhaust treatment method outlinedabove. Here the optimal combustion and the accordingly high rate of effi-ciency result in extremely low fuel consumption and minimal emissionsthat – as far as soot particles and PM are concerned – are equivalent tothose of exhaust gases treated by diesel particulate filters. These benefitsare however compromised by relatively high NOx emissions, which arethen treated with the BlueTec® technology. A decision in favour ofBlueTec® is hence a decision not only to comply with the upcoming

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Euro-4 and Euro-5 emission standards, but also to effectively reduce PMemissions. Independent studies by the TÜV-Nord have proven the effec-tiveness of this method. Compared to an Actros 1846 with Euro-3 specifi-cations, a BlueTec® 5-equipped Actros showed a reduction of PMemissions of 84 per cent and a reduction in nanoparticles, a constituent ofPM, of 80 to 90 per cent. In addition, other legally unregulated emissionswere found to be below the verification limit or virtually nonexistent.

BlueTec® not only has environmental benefits, it also cuts operatingcosts because of lower fuel consumption and subsidies in severalEuropean countries. In Germany, for example, the toll per kilometre onthe Autobahn is 2 cents lower for a Euro-5 specification vehicle than thetoll for a Euro-3 compliant vehicle. In Austria, BlueTec®-equipped trucksare exempt from the prohibition from using the Inntalautobahn at night.

A BlueTec®-equipped truck in typical long-haul operation can saveapproximately 1,500 to 2,000 litres of fuel per year, which has beenimpressively proven by independent tests: The Trucker magazine forexample took an Actros 1848 equipped with BlueTec® 5 technology on a350 kilometre round-trip test drive including gradients of up to 10 per

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Figure 13.14 BlueTec®-equipped Actros with Euro-4 or Euro-5emission level and AdBlue® tank

cent. At an average speed of 76 kilometres per hour, the Actros consumedonly 31 litres of diesel per 100 kilometres, equalling 7.59 mpg – a dreamresult, as the magazine states in its July 2005 issue.

The road ahead: BlueTec® to be introduced in buses inlate 2006

From October 2006 on, the BlueTec® diesel technology will also beavailable in Mercedes-Benz and Setra buses for urban transport, charteredand overland operation. Further vehicles equipped with BlueTec® 5 tech-nology are to follow in 2007, already complying with the Euro-5 emissionstandard that will enter into force in 2009.

With the introduction of the BlueTec® diesel technology inDaimlerChrysler buses we will further boost the success of this youngtechnology in Europe. In Germany alone, more than 5 billion trips aremade by bus every year, which according to a VDA study makes the busthe second most important means of transport after the passenger car.The increasingly strict limits of the European emission standards of therecent years have led to a drastic reduction in the emissions of diesel-powered buses – and of all other diesel-powered vehicles as well. Byutilizing the BlueTec® technology, we will be able to fulfil the Euro-4and Euro-5 standards and offer all the economic benefits outlined abovefor our buses too.

If a further reduction of the particle emissions beyond the very strictEuro-4 and Euro-5 standards as achieved with the BlueTec® technologyis required, the BlueTec® emission control system can be combined witha diesel particulate filter, which will be available as an option for busesdesigned for local public transportation from the beginning of 2007 on.Our system will then comply with the EEV (Enhanced Environmentallyfriendly Vehicle) requirements, the currently strictest European emissionstandard for buses and trucks, which even exceeds the requirements of theEuro-5 standard.

Nowadays more than ever, economy and ecology must be reconciled,and this of course also applies to buses. BlueTec® provides the solution toresolve this dilemma: the additional cost over current buses equipped withEuro-3 engines pays off very quickly, as the 6 per cent lower fuelconsumption compared with today’s Euro-3 vehicles means not only asignificant reduction of emissions for the environment, but also a costreduction to the bus owner.

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CLEAR OUTLOOK: THE FUTURE OF THE DIESELIS BLUE

Offering the best to our customers is our motto when designing andbuilding our vehicles. This also applies to the diesel drive. This principlewas our guideline for the first diesel passenger cars 70 years ago andnothing has changed since then. On the contrary: the diesel’s successstory provides an obligation and a motivation for us to think ahead andmake new technologies available to our customers. With BLUETEC, afurther ground-breaking innovation continues the longest dieseltradition among all automotive manufacturers worldwide, and onceagain highlights our great competence in working out revolutionarysolutions in powertrain technology, which at the same time enhance ourtechnological leadership. BLUETEC sends a clear message: the dieseldrive has the potential of complying even with the strictest exhaust-gasstandards worldwide without compromising vehicle dynamics ordriving pleasure.

In the commercial vehicles division, this innovation has proven its suit-ability for rough everyday conditions and has turned out to be a truewin–win situation for the customer and the environment. We considerBLUETEC to be a technology of global importance. We will consistentlypromote the introduction of this technology in a multitude of vehiclemodels and markets with dedicated commitment – to the advantage of ourcustomers and to the benefit of our environment.

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Figure 13.15 Mercedes-Benz Citaro bus with the BlueTec® system

BLUETEC: PART OF THE ROADMAP FORINNOVATIVE POWERTRAIN TECHNOLOGIES

Apart from the ecological advantages that vehicles with optimized dieselengines in combination with the innovative BLUETEC technology offerin terms of significantly lower NOx emissions and reduced CO2 emis-sions, further potentials for reducing fuel consumption can be opened upon the basis of optimized combustion engines through hybrid vehicles. Inthis context it needs to be pointed out that every hybrid vehicle is only asgood as the combustion engine propelling it. Hence every optimization onthe combustion side will also be to the benefit of the hybrid vehicles. Onesuch optimization is for instance the second-generation gasoline enginewith direct injection, with which we succeeded in performing an inno-vation leap with regard to fuel consumption and engine performance. Thenew, jet-controlled combustion system permits an optimal mixtureformation, significantly improving thermodynamic efficiency. With thistechnology, low fuel consumption and excellent engine-power character-istics are no contradiction. This further development of the combustionengines is supplemented by high-quality alternative and synthetic fuels.Only in combination with optimized fuels can fuel consumption and emis-sions –for both the gasoline and the diesel engine – be further reduced.

The fact that the hybrid drive is no panacea for a general reduction offuel consumption and CO2 emissions has been proved by a German auto-mobile magazine, with a comparison drive between a diesel and a hybridvehicle on a course across the United States. Over about 5,200 kilometres,a Mercedes-Benz ML 320 CDI with a new V6 diesel engine consumed onaverage approximately one litre less per 100 kilometres than its hybridrival. A large part of the course led over freeways and highways, on whichthe diesel drive clearly outranked the hybrid drive in terms of fuelconsumption. Even during city drives, the modern and highly efficientdiesel engine showed all its power and only required about 2 per centmore fuel than the comparable hybrid vehicle. The comparison testshowed in a quite illustrative manner that the advantages of the hybriddrive mainly come to the fore in inner-city traffic.

In the years to come, the hybrid – either as mild or as full hybrid – cansupplement the combustion engine, depending on the region and trafficsituation, wherever it is useful and economic for a more efficient use offuel and for increased vehicle dynamics and comfort. It is therefore ourobjective to be able to answer the various customer requests with asuitable drive system. With the Two-Mode hybrid system we are devel-oping a full-hybrid technology in cooperation with the General Motors

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Corporation and the BMW Group, which will improve the performancecharacteristics, the fuel consumption and the range of a conventionalhybrid vehicle. The advantages of the new system enable us to offer ourcustomers convincing hybrid vehicles with attractive performance,comfort, fuel-consumption and emission characteristics at competitiveprices. With the Dodge Durango, we will introduce the first Two-Modehybrid drive to the market in the beginning of 2008, and shortly after that,we will extend our offer with further models.

In the long term, the fuel cell continues to be the future drive system forsustainable mobility. With more than 100 vehicles – passenger cars, busesand vans – DaimlerChrysler has the largest fuel-cell fleet among all auto-motive manufacturers that is in daily use by customers worldwide. By theend of March 2006, the entire fleet had reached a mileage of almost 2million kilometres (1,243,000 miles) in more than 100,000 hours of oper-ation. With more than 2,000 hours of operation without loss inperformance, the current fuel-cell generation clearly exceeds expecta-tions. The ground-breaking further developments of recent years show thegreat potential that lies in this comparatively young technology. Webelieve in this potential and the added value for the customer and the envi-ronment. The fuel-cell drive is an integral part of our strategy for inno-

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BTL fuels (eg SunDiesel)

Figure 13.16 Road map for innovative powertrain technologies

vative drive technologies. We intend to introduce the first fuel-cellvehicles to the market between 2012 and 2015.

Our integrated approach in drive technology thus contains a number ofmeasures and technical innovations that contribute to saving resources andreducing fuel consumption, and that already offer our customers a broadand attractive technology portfolio. We are consistently following the pathto more sustainability, step by step. But it is certain that vehicle technologyalone will not be able to ensure sustainable mobility. Rather, all partiesinvolved must be included, starting from the automotive manufacturer andheading via the mineral-oil industry and the politicians to the customers.

We as automotive manufacturers are facing this challenge and responsi-bility every day with the utmost commitment.

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Figure 14.17 An integrated approach: the contribution from all parties

14

Bharat Forge: emergingplayers from emergingregionsBabasaheb N Kalyani, Chairman, Bharat Forge Group

This chapter is about a rapidly growing auto parts company from India thathas become a thriving multinational. I review our progress and argue thatcost arbitrage is a misplaced notion, and it is the intellectual capitaladvantage at the macro level, and its management at the micro level, thatexplains the emergence of players like us in the global arena. I then attemptto explain our management philosophy in terms of vision, focus and action.Through that perspective I dwell on three key business drivers:

� technology;� scale and growth;� competitiveness.

Finally I present our perspective about, and plans for, the future, whichessentially hinge on harnessing intellectual capital for providing fullservice, innovation and deriving the synergies of a global organization.With this, the essential proposition to the reader interested in masteringautomotive challenges is that there is a lot that is possible at the companylevel through a fundamental business-driven approach coupled with arisk-taking ability.

The tumultuous macro-level challenges facing the automotive industry areamplified when they confront parts suppliers to that industry. The demandderived from nature, whose prospects are in general cyclic, and are specifi-cally based on the programmes and customers the industry caters for, as wellas the structure that sandwiches an already fragmented base between

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powerful buyers on one side and powerful raw material suppliers on theother, almost seem to make the auto parts industry intrinsically unattractive.Yet we at Bharat Forge can pride ourselves on being a successful global autoparts company. From our largest single-location factory based in India toglobal footprints through acquisitions in Europe and the United States and arecent joint venture in China, we have achieved visibility beyond thepurchasing departments of the automotive industry.

For the information of those who are yet to know us well, we have risento a leading position in the merchant forging industry in just over 40 yearsof existence. Today we are the leading supplier to almost all the globalOEMs and tier 1 suppliers for forged and machined engine and chassiscomponents which are critical for the safety and performance of automo-biles, like crankshafts and axle beams. We have capabilities in steel andaluminum forgings that add value to a significant proportion of these partsthrough highly complex machining. We support our customers in front-end design and development, and in post-production testing and vali-dation. We supply commercial vehicle and passenger car segments as wellas non-automotive sectors such as the oil and gas industry. In certainproduct categories we already have global market leadership.

Over the last few years we have experienced a scorching organicgrowth rate of 40–45 per cent per year, then topped this up with a spate ofacquisitions. Our consolidated revenue in the financial year ended March2006 was about US $700 million, of which close to two-thirds was fromoutside India. The compound annual growth rate (CAGR) of total groupsales over the last four years works out to 66 per cent, while the corre-sponding figure for revenue outside India is 110 per cent. The Indian oper-ation also sells almost half its output abroad (the figure was just about 20per cent five years ago), and is the largest Indian exporter of auto parts.

The first and commonest reaction to the success of players such as us isthat ‘they are from LCCs (low cost countries)’ and therefore the result ofthe outsourcing drives of OEMs. Yet which automotive buyer would usecost as the sole consideration? For example, the costs of line downtimescaused by logistics or quality-related problems would be far higher thancan be compensated for by any costs saved at the parts level. Lower costscan be necessary as ‘qualifiers’ but they can never be sufficient by them-selves as ‘winners’.

One explanation is that the buyers themselves equip suppliers fromemerging regions (LCCs) with the other ‘hygiene’ factors required, suchas quality systems and supply chain management, in return for gettinglower-cost supplies. While this is true to some extent, it is neither valid forall companies, nor does it fully explain how some suppliers can be better-than-average profitable in a sustainable manner, for this requires that they

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become world class, and becoming world class has to be result of an urgeand effort from within.

So finally what explains the fact that there are some emerging playersfrom emerging regions, like us, who if they have not yet been noticed bycustomers, competitors and the world in general, will be over the nextfew years?

Before I get into this, let me digress a bit and unequivocally state thatthere is an Indian advantage, which indeed provides us with a macro-leveledge, but that advantage is different from what it is normally perceived tobe. Auto part outsourcing is gathering pace as end-vehicle prices areexpected to remain stable in the future while customers expect vehicles tohave more and better features. OEMs and tier 1 suppliers in WesternEurope and the United States are therefore looking to cut costs bysourcing from or creating bases in the lower-cost economies of EasternEurope, South America, South-East Asia, China, India and so on.

The Indian auto parts industry has been growing in double digits for thelast few years, with the exports driving the growth. However, its annualturnover is still only about US $9 billion, of which about US $1.5 billionis from exports; it has not even scratched the surface of the globaloutsourcing potential. While self-sufficient in many respects, its largebase of more than 6,000 manufacturing units is highly fragmented. Onlyaround 5 per cent of the companies might be organized enough, forvarious historic reasons, to tap this global opportunity.

At the same time, all the reports, predictions and indicators regardingthis industry are highly positive. With every year, a higher proportion ofexports is going to OEMs and Tier 1 suppliers rather than to replacementmarkets. According to a report by McKinsey, India-based automotivecomponent manufacturing has the potential to grow to US $33–40 billionby 2015, of which US $20–25 billion would be in exports. Growth indomestic consumption to US $13–15 billion is also not out of reach if weconsider that in numerical terms India has the second largest tractor andtwo-wheel vehicle, and the fifth largest commercial vehicle, manufac-turing base in the world, and also has the fourth largest passenger carmarket in Asia.

But is this all merely because India has low labour costs? It cannot bedenied that Indian labour costs per hour are low, but the net impact on thebottom line after discounting for lower productivity is contestable. Even ifproductivity levels improve, this labour cost advantage is not structurallysustainable in the long run, especially when compared with countries suchas China. Where India scores is in its strong base of intellectual capital,which allows us to deal cost-effectively where the technology intensity isrelatively high, even if volumes are relatively low. The quality of engi-

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neers and managers available in India in large numbers and with the rightage profile is what determines India’s competitiveness, and what shouldcontinue to determine it in future. A T Kearney’s 2004 Offshore LocationAttractiveness Index gave India the top position by a comfortable marginbecause of its strong mix of low costs and rich human resources. A recentKPMG report also suggested that, despite infrastructure issues, India is inan advantageous position for precisely the same reasons.

Let me give you our own example to illustrate the confidence we canhave in our intellectual capital. In the late 1980s when we went for a highlyautomated press line to replace hammer technology, we also decided toreplace the blue-collar workforce with college graduates, most of whomwere fresh from college. Our rationale for this was that absorption of thetechnology involved a certain level of intellectual maturity and even adifferent cultural set-up. Over the years, while the workforce size has goneup, its mix has moved substantially in favour of white-collar workers.Today we employ more than 1,200 engineers, and yet our employee cost asa percentage of the top line has actually gone down.

It is of course one thing to know a fact for oneself and quite anotherthing for someone else to buy the argument. The Indian engineeringindustry here must give credit to the domestic IT industry for showing theworld that India has an edge in terms of intellectual capital, and for estab-lishing its credibility in terms of quality of products, service and delivery.The Indian engineering industry might not yet have found its rightfulplace in the global business world, but it is finding its feet and doing sowith a confidence reflected in the investments it is making to enhancecapacities, productivity and technology. To talk about our own forgingindustry, it might already be deemed a sunset industry in the Westernworld, but for us this market, which could be as much as US $15 billiondepending upon outsourcing levels, presents a growth opportunity.

Let me come back now to the micro or firm level. In my view if we havebeen able to achieve something, the explanation for that is quite simple. Ibelieve that it ensues from three basic, sacrosanct management principles:vision, focus and action, though our interpretation of these terms might bea little different from the conventional one. Let me first therefore expandon each of the three, to make it simpler to relate them to key facets of ourbusiness, both historical and future.

Vision

To us vision means a dream, a concept that might at the first be met withscepticism. But I feel very strongly that if we have achieved something, it

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was because we first dreamt really big. At the same time, vision cannot bea pipe dream. Ambitious and yet practical visionary insights can arise onlyout of the knowledge and rational analysis of the way industry is likely toevolve. Vision therefore is not just a one-time target-setting exercise, butis about the place we must carve for ourselves as the industry evolves. Inother words, vision must also be about reinventing ourselves, our ownfuture. (As Alan Kay said, ‘The best way to predict the future is to inventit.’) This reinvention is required no matter how small or large we are,because external changes are too dynamic, too powerful and over-whelming to control. Rather than turn the tide, we must learn to swim withit. To summarize, vision means dreaming big and constantly inventingnewer business models for ourselves.

Focus

Business is all about the judicious allocation of limited resources, such asmanagerial and financial. Focus is therefore important so that we do notspread these resources too thinly, but it does not necessarily imply that weshould be narrow in everything we do. All our resources must be concen-trated on the core business and its fundamental drivers. The businessdrivers might be outside our organization, in terms of what value we mustdeliver, or they might be inside our organization, in terms of how we mustdeliver that value. This is also the essence of business strategy.

Action

If there is a difference between developed economies and LCCs, it is here,since LCCs have much ground to catch up, and hence need to be near-fanatical in implementing their business plans. Ambitious dreams have nomeaning unless we act upon them with equal aggression. Let me illustratethis with an example. Because of the tooling and set-up costs involved,there is a certain minimum economic quantity at which we can manu-facture anything. But when a prospective US buyer visited to evaluate ourmanufacturing capability, we produced his product physically in front ofhim and presented him with a sample for testing purposes. Needless tosay, we went on to bag a major order. We believe that the risk of (morecomfortable) inaction is higher in most cases than the risk of erroneousaction. ‘Proactive management’ is all about astute vision and strategy,which is followed up by agile action.

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Let me now deal with the key facets and developments of our businessto illustrate the above point. There are three fundamental value drivers:technology, scale and growth, and competitiveness. As I expand uponthese, it will be clearer that these have also been cornerstones of ourhistorical development. You might wonder why customer orientation doesnot find a place here, but the fact is that business is all about deliveringvalue to the customer, and so value drivers have a meaning only in thecontext of customers.

TECHNOLOGY

I would like to elaborate on this issue at some length since I feel stronglyabout it, and also because it has a bearing on other aspects that I shall discuss.

Our company was established in the 1960s. Those were the days of the‘licence and permits’ era, in which Indian industry was shackled. Thoughpolicies favoured self-sufficient indigenous industry and there was anurgent need for it, it took us four years to get an industrial licence to set upforging facilities, so production could only start in the mid-1960s. Therewas also no technology base available in India. We had to collaborate toobtain it, and rely almost entirely on the inputs of our collaborator.

Slowly and steadily we established ourselves in a leadership position inIndia by the mid-1980s, yet we were not able to make much mark in theglobal market, and especially the developed world, despite our almostdecade-long concerted efforts. We slowly realized that what we neededwas a completely different production technology platform for thispurpose, one that ensured a far more reliable process and consistent output.

In the late 1980s we therefore invested in state-of-the-art automatedpress lines. The technology was so advanced that there were then very fewpeople in the world, and no one internally, who understood it fully. We hadto struggle extremely hard to make sure that what was being labelled byour detractors as a ‘white elephant’ danced to our tune, but dance it did.Our prospective customers soon started realizing what we could achieve,and our capability to supply to them technologically complex products ina highly cost-effective way. Such proactive investments in state-of-the-arttechnologies and facilities have indeed been our driving force. Todayanother forging facility, equally technologically modern, has come up forpassenger car parts.

Machining is another example. Even today, most forging suppliers donot have machining capabilities of their own. We recognized that forgingby itself would be commoditized in the long run, and decided to set up our

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own machining facilities way back in the early 1970s, for down-the-linevalue addition. Presently our machining generates almost as much valueas forging. Looking at the demand from more and more customers tooutsource the production of fully finished products that can go directly ontheir assembly lines, we have just set up another state-of-the-art facilityfor machining, which is ahead of the times in terms of ensuring highlyenhanced product quality and delivering it in very low cycle times.

Another key technology focus is engineering function. The forgingindustry has come a long way from the days of toolmakers, who wereessentially specialist craftspeople, to computer-aided design, engineeringand manufacturing (CAD/CAE/CAM), where a part drawing can be trans-lated into a tooling design, which can be directly used to manufacture adie, and which in turn can produce a physical part as per the originaldrawing. In this area we have focused on ensuring that our speed to marketis the fastest by optimizing this entire cycle.

In the ultimate analysis, then, the technological shift is all aboutredefining forging from an ancient art to a modern science. Theknowledge earlier resided in those who were also required to execute it:that is, those who did the work had the knowledge. Today that executionhas been deskilled, as the entire accumulated knowledge has been proce-duralized and built into the machines and processes. This is central toensuring a reliable and consistent output. However, not anyone can simplybuy equipment and start producing as efficiently as anyone else. There aremany touchpoints involved, and that makes the task of technologymanagement as intricate as the underlying technology.

Scale and growth

Size has its own advantages. It is not, however, merely because there areproduction economies of scale, but because there are economies of scope:greater and better choices the business has regarding research and devel-opment, marketing, human resources (HR) and long-term investments.Scale gives you some stature, it enables you simply to sit across the tablewith global auto giants. Even today of the more than 300 forging units inIndia, only a handful have the size and capability to supply to OEMsworldwide. We could have been one of the many that do not, but wepursued scale and growth aggressively. When we decided to go in forautomated presses in the late 1980s, we also decided to go in for capacitysufficient to put us directly in league with top manufacturers in the world.The move was fraught with danger: the cutting edge technology and aninvestment comparable with our top line back then could have bled us dry!

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But thanks to such moves, today we have successively reached a globalscale of operations that can provide a wide range of products very cost-effectively. Over the last 10 years our forging capacity has been rampedup five times, and it presently stands at 500,000 metric tonnes per annum.Our machining capacity is also impressive (in numbers per annum):650,000 crankshafts, 500,000 front axle beams and 600,000 steeringknuckles. We can manufacture parts ranging from 2 to 250 kg in ourclosed die forging shop.

Our investments have always been proactive. Further, they have been on ascale and of a technology that the customers would find ever more attractive.Our current investment programme, which has already made us the largestsingle-location plant, will see this level exceeded by the year-end.

However, even as this investment programme was being conceived, wehad started thinking in terms of inorganic growth. We had already made abeginning in 2002 by acquiring the order book of Kirkstall Forge, UK.This move also strengthened our position in the oil and gas sector.

The reason for inorganic growth through capacity acquisition was thatwe felt that OEMs, especially European companies, preferred to usevendors in their proximity for certain sets of products where they couldafford to trade off some cost disadvantages. We actively scouted for acqui-sition targets, and by the end of 2003 had acquired Carl Dan Peddinghaus(CDP), and by the end of 2004 CDP Aluminiumtechnik, both based inGermany and having about 1,000 employees. CDP is one of the oldest andthe largest forging companies in Germany. Founded in 1839, it has plantsat Ennepetal and Daun (near Düsseldorf). CDPAluminiumtechnik was setup in 1997 at Brand Erbisdorf (near Dresden), and specializes in the nichealuminum chassis component segment.

These moves quickly consolidated our position across vehicle andmarket segments. As soon as the acquisitions were completed, we alsostarted enjoying immense intangible benefits, significantly more than thetangible ones they brought. It was not difficult then to decide to have aglobal footprint and to shift our attention to the largest market, the UnitedStates. Rising steel prices and downward pressure on prices from OEMshave driven a number of suppliers in the United States to Chapter 11 of theUS Bankruptcy Code. Federal Forge Inc based in Lansing, Michigan wasone such company, which had filed for protection in February 2004. It wason this that we focused our attention. Federal Forge was a 43-year-oldestablished name for designing and manufacturing complex forged steelpassenger car parts such as control arms, links, steering knuckles andconnecting rods, with a well-regarded client list. From our point of view itpresented a significant opportunity to expand our global network andestablish a presence in proximity to the Big Three.

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In September 2005, we acquired Imatra Kilsta AB, Sweden, along with itswholly owned subsidiary, Scottish Stampings, Scotland (Imatra ForgingGroup). Imatra Forging Group is the largest manufacturer of front axlebeams and the second largest crankshaft producer in Europe. This acqui-sition completes our global dual-shore capability. We can now produce allour core products – crankshafts, beams, knuckles and pistons – in aminimum of two locations worldwide, and provide design and engineering,and technology front-end support, close to customers for these products.

More recently in March 2006, we have established a Joint Venture (JV)in China with FAW Corporation, the largest automotive group in China.With this JV, Bharat Forge is the largest auto forging company in China.FAW Bharat Forge will progressively position itself as the competitivecost producer of highly engineered forgings for the international market.

All these acquisitions are aligned to the core of our strategy: to enhanceour competitive advantage by giving complete service and better value toour global customers, and to continuously strengthen our share ofbusiness with them. In all our acquisitions we have focused on leveragingthe intrinsic strengths of those businesses to significantly improve theirperformance. We are happy to note that the same organization and localmanagement have now been able to grow those businesses, and the groupas a whole has also benefited.

COMPETITIVENESS

There are number of strategic and operational issues involved in maintainingcompetitiveness, where to ‘maintain’ it means to continuously improve uponit. The strategic issue is partly related to the cyclical demand patterns of theindustry. Because of the high capital costs involved, a recession is enough todrive a company to bankruptcy. Strategically we have reduced the risk to ourbusiness by broadening our customer base. We have also constantly prunedand focused our portfolio on technologically more complex products. On theoperational front inculcating excellence is critical, but then the auto industryis a key propagator of its theory and practice. So rather than spending muchtime here, I would just like to touch on what we have been able to achieve.Over the last four years, our employee productivity has gone up 2.5 times,our cash-to-cash cycle has been cut by one-third through prudent inventorymanagement, while the sales to net fixed assets ratio has almost doubled.

The future poses more challenges, and therefore it also presents greateropportunities. In the next two years, we want to double our top line toreach the US $1 billion mark. That is our ambitious dream. But it is not a

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mere question of adding capacities, it is more about capabilities. In otherwords, it is about brain-power rather than brawn-power. This brings usback to intellectual capital-led advantages. With this perspective, myagenda for the future has three main, all ‘soft’, components: serviceprovider capability, innovation and synergy.

Full service provider capability

I think we are long past being a production-driven organization and havebecome a technology-driven organization. Rather than physical volume, itis the distinctive product that has become important in this shift. We havealready geared ourselves for the next shift, whereby what we will be deliv-ering is not just the product but also all the services around it, such asdesign and development and validation and testing. We presently havemore than 150 engineers working on such services, and as we partnermore and more with our key customers, this number is expected toincrease manifold.

INNOVATION

So far parts suppliers have focused on innovation in terms of productioncosts and operational excellence, but gone are the days when auto partssuppliers would merely produce components to the customer’s drawings.The domain knowledge related to the parts rests with the parts supplier, andtherefore the supplier is in the best position to innovate and add value. Thismight be from design, which actually controls a significant proportion offinal product costs, to quality aspects. The need for proactive co-development is acknowledged today by most OEMs, and is the key tocompressing speed to market. Our group has undertaken a number ofprojects where the knowledge gained by us over the years in the areas ofmetallurgy, forging and machining can be applied in a systematic fashion,thus making us a true development partner of our key global customers.

SYNERGY

With our global manufacturing network we not only have global capacity,we have added intellectual capital and a valuable set of best global practices.

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Just benchmarking within the group and ensuring that the best practices areshared and assimilated by all the units would help further improve value ofeach of the entities. There are other synergistic benefits that follow, andthere are ways to optimize at the system level rather than locally. Forexample we can provide dual shoring capability to customers’global opera-tions. We are already pooling our R&D and engineering capabilities.

Management of intellectual capital in a cross-cultural setting is adifferent challenge, and not an easy task, but we are working at it throughstructured and unstructured integration measures.

I hope I have been able to offer to the reader some insights for masteringautomotive challenges. As a final note, in today’s competitive world wecannot ever be complacent. Success is not a destination to be arrived at. Itis at best a milestone on the trajectory that we chart for ourselves, wherewe are not allowed to sit and rest!

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ConclusionRalf Kalmbach, Roland Berger Strategy Consultants

The automotive industry counts as one of the key sectors in mostdeveloped economies. It has clearly proven to be among the strongestglobal drivers of technology, growth and employment. More than 8 millionpeople around the world work directly in the production of vehicles andautomotive components. Every year, the industry invests around €70billion in research and development. These two facts alone provide animpressive insight into the importance of the automotive industry.Nonetheless, the sector is no longer just a driver. Its companies are increas-ingly being pushed by new and ongoing processes of change. A number ofdifferent factors are stepping up the pressure auto makers face today:

� idle capacities;� new competitors hailing from ‘new’ automotive markets, such as

China or India;� cost competition between production sites and countries;� new technologies;� changing legal requirements.

Combined with a change in the overall economic landscape, these factorstranslate into an enormous challenge for an industry which requires greatstability and solid planning, given its capital intensity and long devel-opment and investment cycles.

The automotive industry has always been forced to adjust to significantchanges in overall market conditions, technologies and customer prefer-ences. In the past, such crises concerned organizational aspects (such asthe R&D and production process crisis of 1992/93). Today, the focus is onglobalization-driven adaptation processes. We are facing a new kind ofchallenge. The emphasis is no longer on isolated elements of the businesssystem. Rather, the technical, political, economic and global structures on

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which auto makers founded their business systems are changing simulta-neously. Hence, the traditional rules no longer apply.

New markets are emerging – markets in which local automotive indus-tries develop rapidly, producing new players (such as Bharat Forge) thatinstantly take on a prominent global role. These companies appear toknow the new success factors and rules very well, frequently even betterthan traditional manufacturers. They are encroaching upon the very exis-tence of the former market leaders.

Phases of massive change shake industry sectors to their very core, andthe automotive industry will share this fate. Not all companies will be ableto address the opportunities – but also the risks – of such developmentssuccessfully, or even anticipate them. Only a few are in a position to alignthemselves with novel conditions that they can take advantage of for theirown success.

THE SUCCESS FACTORS OF TOP PERFORMERS

In numerous projects, Roland Berger Strategy Consultants has been ableto determine which factors are particularly developed in the mostsuccessful companies. These top performers:

� have in-depth customer understanding;� have clear entrepreneurial visions and goals;� develop long-term prospects;� place a lot of emphasis on customer loyalty;� consistently meet the ‘value for money’ promise in both low and

premium price segments;� consistently deliver first-rate quality;� boast a global presence, but are regionally oriented;� are driven by a strong entrepreneurial spirit.

THE PROBLEMS OF LOW PERFORMERS

Low performers have a tough time implementing these success factors.They frequently fail for very similar reasons:

� They miss key trends.� They either fail to adapt their business system, or do not do so at the

right time or consistently enough.

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� They lack a sustainable corporate strategy.� They have no vision, or their vision is not clear enough.� They are driven by short-term profits.� They do not possess an autonomous profile.� They do not provide adequate value for money.� Their branding is not consistent.� They lack entrepreneurial courage.� They do not have an early warning system.

However, the automotive industry has accepted the challenge. Forecastsissued by prophets of doom such as the Club of Rome, and thewinner–loser scenarios introduced in James P Womack, Daniel T Jonesand Daniel Ross’s book The Machine That Changed The World (Rawson,New York, 1990), have been made obsolete by reality. Nevertheless, itshould be noted that the next round of the ‘automotive power play’ hasalready begun. In the next couple of years, automotive executives willhave to lay the foundations for the survival and future success of theircompanies. They will have to overcome crucial challenges and implementconclusive strategies and business systems. In this context, five actionareas are key:

� market;� globalization;� sales;� value creation;� technology.

THE MARKET CHALLENGE

Automotive markets have changed significantly. Not only have newmarkets in emerging economies been added, but substantial changes incustomer behaviour patterns are forcing the industry to pay much closerattention to its clients and to develop a new understanding of theirdemands. The dictum ‘supply generates demand’ no longer applies to theautomotive industry. Customer preferences have shifted enormously orhave even dissolved completely. It was the automotive industry itself,with its excessive product offerings, that laid the groundwork for thisscenario. Now it must live with the consequences.

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Conventional forecasting models that are based primarily on the inter-pretation of sociodemographic information simply do not work any more.Income and social status do not lead customers to certain brands,segments or products in a world full of niche vehicles and lifestyleconcepts. As a result, the risks for auto makers have increased substan-tially. After all, huge investments are required to develop and launch newvehicles. This trend is further accelerated by the decline in the number ofvehicles produced per type – a tribute to strong product programme differ-entiation combined with ever shorter product lifecycles.

In Europe and the United States, growth is no longer restricted to themidsize and premium segments – a scenario that has never applied toemerging markets anyway. Instead, a significant ‘entry-level segment’ isdeveloping. It encompasses vehicles that cost less than €10,000 in Europeand even less in markets such as China or India. In these countries, theentry-level price for ‘individual mobility’ is around €3,000 for a new car.These market segments are growing disproportionately on the worldmarket, and are forcing the automotive industry to develop suitablemarket, technology and value creation strategies. New competitors thatfocus on the entry-level portfolio are emerging, and their low-wageorigins afford them crucial advantages in terms of competitive pricing.Car makers must rethink and realign their businesses.

In this environment, accessing customers via sales is increasinglybecoming a key success factor. The frequently stiff and multi-level salessystems inherent in a largely unchanged manufacturer–dealer rela-tionship do not accommodate this development, but do offer huge opti-mization potential. Substantial areas for improvement exist along theentire sales-related value chain, which can increase profits and improvecustomer loyalty.

The pressure to innovate in the automotive industry continues toincrease dramatically, and compels companies to completely realign theirdevelopment processes and structures to make the complexity anddynamics of product creation manageable. Modular and platformstrategies as well as standardization, frequently encompassing severalauto makers, are adequate solutions. However, they require deep strategic,process-related and cultural changes. Auto makers are not only challengedby changing customer behaviour patterns, but also by a substantial shift inthe importance of market segments.

The key approaches for realignment in this context are explained inmore detail in the following.


Identifying and understanding customer needssystematically

If you want to understand your customers’ needs you have to know whoyour customers are. Determining the target group precisely and clearlydefining the market position and value proposition are absolutely essentialto align product and service portfolios consistently with potentialcustomers. A comprehensive and consistent brand experience can beensured only if high-quality service portfolios are coherently imple-mented across all sales phases – from the initial customer contact to thepoint of sale.

To win customers, create enthusiasm and brand loyalty, companiesmust create emotional and rational value beyond the mere product itself.The automotive industry has made tremendous efforts and has investedsubstantial amounts in sales and customer relationship managementsystems and initiatives. Nonetheless, it has not yet made a major break-through in this critical field.

Overcoming the limitations of conventional salessystems

At their core, automotive sales strategies are not sufficiently focused onthe needs of customers. Instead of meeting customer needs to the fullestextent possible, excess capacities are pumped into the markets with theassistance of discounts and complex promotions. These activities yieldonly short-term results, as evidenced by the long list of auto makers thatattain only minor success. Not only does this adversely affect profits, italso causes the brand image to decline, which damages the basis of long-term success.

Conventional multi-level sales systems involving importers/nationalsales companies (NSC) are too time-consuming, too complex and tooexpensive. Too much money is invested in sales levels without creatingvalue at the customer interface. This is an approach auto makers will nolonger be able to afford in markets that are ever more competitive.

To overcome this structural complexity and over-assertiveness, dealerscan be integrated as partners nationally or regionally. Cadillac, forexample, transferred the responsibility for its European sales toKroymanns, one of its dealers. Others will emulate this model.

By treading new ground in this way, manufacturers have the oppor-tunity to defy the fundamental ‘one nation = one NSC’ rule and can use

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their resources far more efficiently. And if they also rigorously streamlinetheir networks, they will be in a position to optimize sales through profes-sional improvement and standardization.

Gaining control of the sales channel

The consolidation of automotive sales cannot be halted. The actual keyissue is how to approach this consolidation. Two main directions areapparent: internationalization and multi-brand sales.

Large, often multinational, dealer groups frequently act as a counter-balance to auto makers. Thanks to multi-brand policies, they are lessdependent on manufacturers than traditional single-brand dealers, andare virtually forcing auto makers to cooperate with them and come upwith win–win scenarios. They can no longer resort to confrontation toenforce unilateral interests. This type of constellation goes hand in handwith the opportunity to implement the necessary optimization mentionedearlier by entrepreneurial means. Partnership-based collaboration resultsin the optimum utilization of market potential, and brings businesssuccess. The partners have the opportunity to focus on the areas they arebest equipped to cover.

Customer relationships and the translation of brand values into uniqueproducts and services are elementary core competencies of an originalequipment manufacturer (OEM). Implementing these product and servicecompetencies across the entire sales chain requires an uncompromisingcustomer, sales and service orientation. These, in turn, are among dealers’classic core competencies. Bringing these complementary dealer and manu-facturer competencies together smoothly enables real value to be created.

When OEMs focus on their key competencies and when larger, moreprofessional dealership partners are created, this development is clearlyfostered. Consequently, the recipe for future success is to turn away fromcompetitive thinking and embrace collaborative partnership betweenmanufacturers and dealers. Toyota, for example, uses this partnershipapproach not only in its supplier relations, but also in its sales organization;a concept that makes it much more successful than many of its competitors.

THE GLOBALIZATION CHALLENGE

The automotive industry is steeped in a tradition of globalization. Driven byGeneral Motors and Ford Motor Company, the development of international


markets began in the early 20th century, when distribution companies wereestablished in numerous countries. In subsequent years, production siteswere built in Europe and Asia to service the frequently remote sales markets.The globalization of the automotive industry had thus begun. The driverswere the same then as they are now:

� developing sales potential in growing markets;� taking advantage of lower wages and fixed costs;� leveraging high fixed costs in R&D and production.

While the drivers of globalization have not changed since the early days,the balance of power and the roles of individual companies in the auto-motive industry certainly have. GM and Ford may have been the initiatorsof globalization, steering this development from a position of ‘invincible’market power, but markets nowadays are much more fragmented, and themarket power of individual companies has declined. No company canbypass the basic trends of the industry: the world has become the marketfor each and every one of them.

Global expansion happens in waves

Just as demand for vehicles has increased in recent years, particularly inAsia, the balance of power in the automotive industry has also shifted inrecent decades. The winners were and still are first and foremost theJapanese, and ultimately also the Korean OEMs. They not only estab-lished themselves in the North American market in the early 1980s, theyalso succeeded in making things very tough for local manufacturers. Theirsuccess was based on the attractively priced, high-quality and low-consumption vehicles that US auto makers proved unable to deliver.

In recent years, Asian manufacturers have not only been successfulbecause of their pricing, which was their strongest sales argument until theearly 1990s. They successively took advantage of the flexibility attainedthrough the quality image they had created, which is extremely important inNorth America, and increased their prices. Japanese OEMs can now affordto stay away from cut-throat price wars while still gaining market share.

Following the successful strategy patterns of the Japanese, Korean automakers have entered the US market. They managed to take advantage ofthe gap left when their Japanese counterparts ‘upgraded’, and got afoothold in the American market with less expensive vehicles. From 1994to 2004, Kia and Hyundai’s CAGR grew by more than 30 per cent and 10per cent respectively, which makes them the fastest-growing car brands in

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the United States. Like their Japanese role models, they have consistentlyupgraded and have already arrived in the lower mid-section of the marketin terms of brand awareness and price.

Once again, a gap is beginning to open up at the lower end of themarket, ‘inviting’ burgeoning Chinese auto makers to move forward.They will also implement these successful strategies. The outcome isclear, and it will further worsen the crisis for local US manufacturers.

‘Déjà vu!’

Japanese and Korean brands have also launched an aggressive attack onEurope. No segment is spared: even in the premium segment, these manu-facturers have defined products and strategies that promise success. Whilethe development follows the proven pattern, it is happening more consis-tently and more quickly than it did in the United States. A gap is alreadybeginning to emerge at the entry level of the market, which once again canbe seen as an open invitation.

The first batch of Chinese vehicles has already been launched intoEurope. It is only a question of a few years until Chinese auto makers –thanks to the technology procured from their joint venture partners andglobal suppliers – will be in a position to offer high-quality products andto develop the market from the bottom up. Following the same pattern asin the United States, established European OEMs will find themselvesunder pressure.

Strategic responses comprising more and more complex technologywill no longer do the job, as happened in the early 1990s when Japanesemarket penetration began to increasingly encroach upon Europe.Customer preferences in volume segments have changed because of envi-ronmental conditions. The competition must now be dealt with in allsegments of cost and quality, otherwise substantial danger looms.

Even today, Asian auto makers have become permanent players in theEuropean market. Unlike their US counterparts, European manufacturerswere, however, able to slow down their success. The reasons can beattributed to the strengths of the Europeans in this competition:

� Europe is the home base of the key premium OEMs.� Europe has a strong local auto industry with traditionally high brand

loyalty and (still) high customer loyalty.� Southern European manufacturers maintain a stronghold in the entry-

level segment.


� Technology, innovation and prestige play a major role in gettingpeople to buy a car.

However, these strengths are relative. They apply only as long as customerscan and must factor them in because of their overall situation. All overEurope, the sluggish economic development and the all-encompassingreform of social systems in key economies will lead to changes in theconsumption climate and in consumer behaviour patterns. This will verylikely result in people’s priorities shifting towards lower-priced offers whenit comes to deciding what to buy. The focus of purchase decisions is nolonger on ‘reasonably priced’ but increasingly on ‘cheap’. An adequateresponse to this trend is nothing less than a structural shift in the Europeanauto industry.

Vehicle product portfolios as well as value creation and production sitestructures will have to be aligned with the new challenges in the homemarket and the opportunities inherent in emerging markets. All of this willhave to occur in a networked business system, which aims to combine thecomplementary abilities and strengths of partners and sites in such a waythat the result is competitive advantages which can be implemented on aglobal level. Not all auto makers will succeed in this. Some are simply toosmall, others too inflexible. The current constellation of successful andless successful companies will change forever, partly because some of theplayers have not been factored in to date. They are only now in the processof entering the global scene, and have quite a few advantages on their side.

SAIC is representative of this group. China’s largest OEM recentlysecured key technology and brand licences from Rover. NanjingAutomobile bought Rover’s production lines. Both deals pursue the goalof autonomy from Western joint venture partners, which still dominate theChinese automotive industry today.

By taking the right strategic steps, China will succeed in developing anindependent automotive industry. This industry will have learnt a lot from itsWestern partners, and will use this know-how as a key strength in competingwith its former business partners. At first glance, very little seems tocontradict the fast emergence of the Chinese newcomers, especially in viewof the enormous progress made in recent years coupled with the will and theeconomic possibilities that China has to propel itself into a better future.

On the other hand, the game is not lost yet. Many ambitious companies’expansion strategies have failed in the past. The objective now must be tofind answers to the following key questions:

� How can established auto makers take advantage of the opportunitiesin the emerging markets without fostering unwanted competition?

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� What options do European and US manufacturers have to defend theirhome markets against increased attack from Asian OEMs?

� How can established manufacturers utilize new markets to improvetheir cost base and thus their competitive positioning on a global level?

Embracing the competitionIt is a fact that the impact of globalization is heightening the competitionin the automotive industry, and frequently threatens the very existence ofits players. Those who do not feel the need to take consistent action giventhis situation, and who are not willing to question conventional businesssystems, have already lost the battle. Established manufacturers mustreact to these new challenges proactively and with a clear strategy.

For OEMs clearly positioned in the premium segment, defending theirown market share is less important in the medium term. Their mainobjective is to take advantage of new opportunities in these marketsconsistently. Manufacturers who have not attained a premium positioningor are not strongly entrenched in the segment, or those who are sufferingfrom significant cost disadvantages, will first need to eliminate thesedeficits. At the same time, the growing competitive pressure makes it evenmore crucial that they steadily take the action necessary on this front,some aspects of which are already known to them. Consequently, it ismore important than ever to consistently optimize in-house valuecreation, which includes – first and foremost – making use of the newmarkets offering more attractive production costs. As the examples ofsuccessful auto makers demonstrate, this can work if firms select the‘right’ partners and integrate them into their R&D and productionnetwork. A thorough understanding of current and future market needs isindispensable for those wishing to take advantage of the opportunities thenew markets yield.

A Roland Berger Strategy Consultants analysis identifies the keysuccess factors in relation to global competition. These are:

� more efficient production systems;� modular vehicle concepts;� global market presence manufacturing large volumes on global

platforms;� high quality thanks to proven technology and stable production;� close and intensive integration of suppliers into a network-oriented

business system;� continuous improvement instead of technology leaps with every new

generation;


� understanding of local market requirements;� focused development of low-cost competencies;� consistent strategies and strategy implementation with a long-term

orientation.

The list of actions is long. However, success on the global market can beachieved only with a business system that factors in these aspects and isconsistently implemented by top management.

THE SALES CHALLENGE

Value in the automotive industry comes only partly from developing,manufacturing and selling new vehicles. The after-market is taking on anincreasingly important role. This is concerned with generating value frombusiness with the vehicles already on the road, in areas like vehiclefinancing, maintenance, repair, buying back and reselling used cars, spareparts wholesale and services. These activities are more profitable thanvehicle manufacturing: 50 per cent of auto makers’ profits stem from theafter-market.

In the automotive industry, there is a clear correlation between profitmargins achieved in individual value-creation activities and their prox-imity to the final customers. Often, the closer you are to the customer, themore profitable the business. Consequently, companies selling vehicles,components and related services strive for this closeness. They try tooptimize their share in people’s ‘mobility budgets’ and also to increasecustomer loyalty. As a result, traditional rules, such as ‘original compo-nents are sold through the original equipment supplier (OES) channel,generic parts through the independent after-market (IAM) channel’ or‘spare parts prices are determined by the OEMs and represent bindingreference values’ are increasingly being ignored and replaced by newprovisions, which are strongly affected by a number of crucial factors:

� Product technology and variety: the increasing amounts of technologyused in areas such as electronics, electro-mechanical systems andsystems integration, as well as the large diversity of brands andmodels, make after-sales activities more complicated.

� Changes in the vehicle population: the development of the vehiclepopulation impacts the automotive business. Longer model lifecycles,

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third cars and high adoption rates cause the vehicle population to growand to age. As a result, the number of cars that are more than 10 yearsold is growing at a rate of 3 per cent per year in Germany. The numberof seven to nine-year-old cars is growing at 4 per cent in France and ahefty 10 per cent in Spain.

� Development of customer needs: customers’ demands in terms ofservice quality, reliability and customer relations are high and rising.Experiences customers have in other industries will intensify thisdevelopment.

� Changes in consumer behaviour patterns: the growing number of carsused for business, such as company cars and long-term rentals, inconjunction with a growing and professional portfolio of pre-ownedvehicles available for purchase, are changing customer behaviourpatterns.

� New regulations: while block exemption impacts primarily the spareparts market, Eurodesign affects components with design patents.

� Specialized prescriber groups: insurance companies and associationssuch as Thatcham as well as rating agencies such as Euro-NCAP andJD Power are gaining influence.

� Europeanization: in the aftermath of EU expansion, one of the chal-lenges companies face is how to move into other countries whilekeeping distribution costs as low as possible and avoiding grey markets.

� Sales channel consolidation: in Great Britain and France in particular,large dealer chains control huge swathes of the market. ConsolidatedIAM wholesalers, repair shops organized in corporate groups ornetworks, and large fleet operators are also positioned advantageously.

� New market players: for a while, retail chains were expected to enterthe automotive industry. However, they failed because of the consid-erable market entry barriers. Banks and financial institutions are realnewcomers, as are leasing companies and fleet operators, which arenow trying to gain a foothold in this attractive market.

Consequently, the changed overall framework is challenging the businessmodels of all the companies. In order to secure an attractive share of thevalue creation in sales and customer service, they will have to redefinetheir strategies and organizations.

Changing demand structures in the new car market

Fleet managers (professional car buyers, rental car firms, governmentagencies, private companies) are increasingly becoming intermediaries


between OEMs and final customers. Their importance as customers forauto makers is rising dramatically. Consequently, the business is mutatingfrom selling cars to selling mobility.

Having attained this role, they are in a position not just to securefavourable terms and discounts, but they themselves frequently provideprofitable services such as financing and leasing. Thus, pressure on automakers rises on a dual front – they lose out on profits because of lowerprices and less value creation.

Setting the used car market lever

Sales of nearly new used cars, or cars less than one year old, are growingat a rate in excess of 6 per cent per year, which is more than one and a halftimes as fast as the used car market overall. This, in turn, is growing byapproximately 4 per cent per year, which is much faster than the new carmarket. This can partly be attributed to the increasing importance of fleetmanagement companies, which resell nearly new used cars. It is also aresult of the common practice of having vehicles registered for one day –a system used by dealers to ‘doctor’ their official market share by regis-tering vehicles themselves to subsequently sell them as used cars. InEurope a massive 15 per cent of all vehicle registrations fell into thiscategory in 2003.

There are also one-day registrations that are used as an aggressive toolto increase sales. In Germany, they sometimes make up 25 to 30 per centof all registrations. This volume of intentionally produced used carsmakes the professional marketing of used cars indispensable. Althoughthey require professionalism, these transactions are also very attractive fordealers. After all, a used car usually yields a much higher profit than ahighly discounted new car.

However, this logic does not apply without restrictions. The flood ofone-day car registrations puts intense pressure on genuine used cars, withthe result that the value decreases and system profitability across the entirevehicle lifecycle deteriorates substantially. Many auto makers havebrought themselves to the brink of collapse with this practice. Apart frommanufacturing desirable products, which can be sold with less radicaldiscounts than new cars, auto makers can resolve this issue only bycontrolling and managing used car sales activities and flows more strin-gently. To achieve economies of scale and exploit synergies, they have togive their pan-European networks some degree of influence over local andregional dealers, make what they offer transparent, and even out price anddemand differences in the used car markets of the individual countries.

Conclusion 357

Improved service

Through their experiences in other areas of life, such as tourism, the retailtrade, telecommunications and financial services, consumers havebecome accustomed to higher standards of service. In a world full of verysimilar products, service has become an important, frequently crucialmeans of differentiation.

The key objective is to increase customer satisfaction levels and conse-quently create loyal customers. Despite running a range of programmes,the automotive industry lags noticeably behind other sectors, even thoughthere is no lack of insight into what to do and how to do it. What is missingis professional management of service processes through theOEM–dealer–customer interface. At this time, too many individuallyoptimized activities inhibit a thoroughly positive and consistently repro-ducible customer experience. Mushrooming fast-fit chains are using thisdeficit to their advantage. Their success is down to excellent servicequality, standardized processes, clear rules, flexibility in what they do andwhen they do it, and good value for money.

Customer satisfaction can frequently be achieved at little cost, but itdoes require consistent management.

Original spare parts under competitive pressure

In post-accident car repairs, about three-quarters of the spare parts usedare purchased from OEMs. The remaining quarter is sourced from theIAM. Given that more than 60 per cent of all repair jobs involve replacingonly four to five parts damaged beyond repair, and even wear-and-tear-related repairs centre on a relatively small number of parts (brakepads/discs, exhaust, cooling system, oil filter and the like). IAM dealersand parts manufacturers are eager to expand their share in the supply ofcomponents to repair shops. The introduction of the Eurodesign regu-lation, which allows suppliers to develop original parts without OEMapproval, favours this development. This regulation is already in force inSpain and Great Britain; other countries will follow suit.

Suppliers of cheap generic components will therefore enter themarket as competitors. Established companies are compelled to offeradditional value-added services, such as logistical systems, in additionto attractive prices to help them secure the sustained loyalty of theirprofessional clients.


Tougher competition in repair shops

About 60 per cent of all repair costs are labour costs. Impacting costs inthis area requires better organization, more professional structures, andconsequently size. Cost savings for customers and profit for workshopoperators can be achieved most effectively if the time it takes to carry outrepairs is reduced. As a result, more is expected from parts suppliers (bethey OEM, OES or wholesaler). Logistics, computerized materialsmanagement systems and constant parts availability are key. However,this does not mean that parts prices take a back seat. Only completely opti-mized business systems will protect the future of the spare parts business.

Financial services as an important source of income

Financial services are not a part of OEMs’ core business, yet they make asubstantial and consistent contribution to their profits and revenues. Onekey success factor is customer access at the point of sale. This gives theautomotive banks a competitive advantage. With effective customer rela-tionship management and attractive financing offers, automotive banks playan important role in ensuring customer loyalty and winning new customers.

The established system is now feeling the pressure of increasingnumbers of fleet and rental car management companies, as well as thegrowing number of loan-financed used car sales handled by independentfinancial institutions and commercial banks. Conventional strategies aremoving in two directions. First, automotive banks are expanding theirservice spectrum and acting as commercial banks. Second, commercialbanks are forcing their way into the automotive market, primarily throughcooperative agreements with large fleet management companies whichhave tremendous market power. How successful these strategies will beremains to be seen. Both paths are certainly plausible and the results, as sooften, hinge on the professional and consistent implementation ofbusiness concepts.

Dealer groups play an increasingly important role

The dealer group segment is taking on an ever more prominent role. Insome regions dealer groups already dominate the market. Dealergroups will change the structure of the market significantly in the yearsto come. Many of them are big enough to establish themselves asregional multi-brand dealers offering new and used cars of different

Conclusion 359

brands while also operating efficient repair shops and handling profes-sional financial services.

Their regional presence puts them in a position to develop andmaintain close customer relationships. To the OEMs, dealer groups havea significance that elevates them to the role of ‘genuine’ partners. Theyare in a position to achieve a win–win situation with manufacturers bypersonalizing all elements of the sales process. At the same time, theserelationships are multilateral. In particular, multi-brands involvingseveral OEMs that are in fierce competition with each other must beproperly managed. Nonetheless, it is increasingly only the large retailchains that are in a position to meet the multitude of challenges thatautomotive sales present. The OEMs’ recent consolidation of theirdistribution networks gives this development an extra push. Automakers are acquiring and developing mature partners. A paradigm shiftis on the horizon.

Taking all relevant aspects into account, OEMs are obviously the onlyplayers that can cover the entire value chain with an integrated approach.They encompass everything from new car sales and buying back andreselling used cars to repair and maintenance, spare parts wholesale andfinancial services. They also have the closest contact with the finalcustomers. Hence, they really do hold all of the trump cards. Nevertheless,the success of companies focusing on individual value chain elementsclearly shows that existing structures do not have to stay that way forever.Whether these firms will be able to safeguard their success in the long rundepends largely on the development of business models that are evenmore effectively integrated.

A sales organization that is suitably adapted across all levels will haveto be a central element. Many sales and marketing processes may be ona European level, such as pricing for new and used cars as well asmarketing. Better control of sales activities can only be achieved withincreased integration, which involves reducing the number ofautonomous national sales companies or reinforcing alliances and groupcompanies. Overall, sales structures must be more streamlined andtraditional national organizations within the new EU of 25 nations mustbe integrated into these structures to optimize distribution costs. In thiscontext, leaner structures may also involve the regional consolidation ofbusiness divisions. Many departments, from call centres to payroll, areideally suited for outsourcing.


THE VALUE CREATION CHALLENGE

The pressure on costs and output in the automotive value chain has consis-tently increased in recent years. Auto makers and suppliers were regularlyforced to adapt their value creation processes. Whereas initiatives toincrease the efficiency of individual elements of the value chain sufficedin the past, this approach will not do today.

To be able to grow in spite of stagnating markets and to accommodatecustomers’ wishes for ever more personalization, car makers haveexpanded their model spectrums dramatically. In just 10 years, the numberof models offered by European OEMs has more than doubled. At the sametime as the technical complexity of cars has skyrocketed, developmenttimes have been cut by 10 per cent to 20 per cent.

However, recent experience teaches us that higher development costscan no longer be offset by higher product prices, as was possible just a fewyears ago. Adjusted for the price of technology and equipment, theproducts are becoming less expensive. Pressure on costs is rising andmanufacturers consequently have to raise efficiency levels by any meanspossible. The automotive value chain offers substantial potential in threeareas if it is completely revamped. These areas are outlined below.

Roles in value creation

The roles of all stakeholders in the value creation process – OEMs,suppliers, R&D and production service providers – must be restruc-tured. Although value creation is increasingly being transferred fromauto makers to their suppliers, the current form of cooperation is notthe optimum approach. Far too often, identical competencies andresources are maintained at both ends, or the outsourcing simply goestoo far. As a result, a proper mastery of the ever more complex systemsis lacking.

OEMs will have to address a central issue: which competencies need tobe covered to what depth in-house, and in what areas will the companywant or have to rely to a greater extent on external partners or suppliers?Suppliers and R&D and production service providers, for their part, willhave to gain a clear understanding of where their future business opportu-nities are, which competencies they require and what strategies theyintend to follow.

One of the factors driving this development is the compelling need toemploy capital more efficiently in all brand-shaping areas. This is

Conclusion 361

essential to free up scarce financial resources to fund growth in newproducts, technologies and markets.

For the most part, make-or-buy decisions are still made in isolation. Alltoo often there is no overall concept concerning the future value creationstructure. Manufacturers will systematically have to review all of their in-house value creation processes and clearly define which services theywant to focus on. For suppliers, this entails understanding the valuecreation strategies of their OEM customers in detail and setting up theirown business systems accordingly.

As a consequence, attractive growth opportunities emerge for moduleand system suppliers, and huge challenges present themselves for R&Dand production service providers. The OEMs’ greater focus on brand-relevant competencies increases the proportion of suppliers in the overallvalue chain by about 10 per cent, whereas R&D and production serviceproviders face more difficult times. Given that they primarily servebusiness segments that are closer to car makers’ core competencies, theyare more severely affected by insourcing tendencies.

Physical service delivery

OEMs urgently need to optimize their physical R&D, sourcing andproduction networks in conjunction with their suppliers. In recent years,the focus of automotive industry investments has shifted dramatically infavour of new growth regions (Asia and Eastern Europe). Triad marketsare under enormous pressure. Many companies are compelled to establishproduction sites in low-wage countries simply to ensure their survival.The fact is that as much as 75 per cent of personnel costs can permanentlybe saved by moving to low-wage locations, in spite of lower productivitylevels. Where personnel costs account for 25 per cent to 30 per cent oftotal production costs, this equates to a total cost reduction of 10 to 15 percent, even taking all counter-effects into account. In the intense compe-tition of the supplier business, a figure of this magnitude can make orbreak a company. The trend that sees value creation being offshored tolow-wage countries will therefore not only continue in the years to come,it will actually accelerate.

With that said that, what solutions are available for sites in high-wagecountries? The main approach is to rigorously adjust controllable costs tosuit the given circumstances. The more personnel costs can be reduced –for example by bringing in longer working hours or waiving bonuses – themore insignificant the cost savings of offshoring become. As a result, thesavings frequently drop to a level that renders offshoring no longer worth-


while. This may well be the only way for sites in high-wage countries tostay in business.

Business model

Increased cooperation and the conscious shaping of cooperation modelsbetween all of the stakeholders in the value chain present significant areasof untapped potential. Closer networking and improved collaborationbetween all stakeholders represent key levers for optimizing the auto-motive value chain. Contrary to the demands of the business situation,relations between OEMs and suppliers have deteriorated markedly inrecent years. Considering how interdependent the value chain partnersare, the amount of mistrust and pressure they feed into their relationshipsis anything but helpful. The optimized division of value creation and therealignment of physical service delivery hinge on close cooperation withthe aim of taking full advantage of the potential available. The industry’sapproach to collaboration will have to change radically. Intensive cooper-ation is a must; however, a few important rules must be observed as well.These are:

� Shared projects require clear goals.� Corporate cultures must be homogeneous and all persons involved

must ‘fit in’ with the goals and teams.� The assignment of responsibilities must be defined clearly and on the

basis of competencies.� Opportunities and risks must be shared equally.� Rules for conflict resolution must be clearly defined and contractually

stipulated.

In conclusion, only companies that succeed in defining their future corecompetencies to suit the future markets, and design their site networks tooptimize costs, will be able to survive. Greater conscious cooperation isthe key.

THE TECHNOLOGY CHALLENGE

Technological progress has been one of the strongest drivers in the devel-opment of the automotive industry since its emergence more than 100years ago. Increasing the performance, comfort, safety, economic life and

Conclusion 363

driving enjoyment as far as practicable while simultaneously managingundesired side-effects such as fuel consumption and emissions is whatkeeps developers developing and customers buying new vehicles. Hence,technology competency is at the core of any automotive company – forOEMs and suppliers alike. The automotive industry has seen enormousprogress in this area in recent years. There is no indication that this devel-opment will slow down any time soon. Nowadays, mid-size vehiclesperform like only racing cars used to do, and what is considered standardsafety equipment today could previously be had for neither love normoney, even in luxury vehicles.

The shifting of value creation structures in the direction of suppliers,which goes hand in hand with technological progress, and the growingimportance of specialized R&D service providers, have made key tech-nology accessible to all car makers, regardless of their initial competency.This has resulted in virtually all car brands now having an essentiallyequal, very high level of technology. However, technology alone nolonger serves as a primary differentiation factor as it did in past decades.There are but a few areas of technology that allow auto makers and theirsuppliers to achieve sustainable differentiation. Aspects such as safety,fuel efficiency, environmental friendliness and driving enjoymentrepresent such areas of differentiation.

Despite the technology euphoria, it is also apparent that customershave set clear limits to their ambitions for automotive advancement.Customers are no longer accepting of everything that is technicallypossible, nor are they willing to pay more for it. A painful lesson for automakers was the realization that less is frequently more. Much of theirpain stemmed from the complexity of the technical systems they them-selves had created – and especially from the difficulty of integrating theminto the overall vehicle system. Here too, necessity drove them to rethinkand refocus their approach.

At this time, the automotive industry is undergoing a process of polar-ization. In the top segment, vehicles boasting 1,000 BHP and more arebeing developed, and the lower end of the scale is seeing strong growth inthe entry-level segment. Entry-level cars are primarily reduced to thebasic functions of mobility, and meet these needs robustly and at areasonable price. The massive increase in demand for such vehicles isdriven by the opening up of enormous markets (China, India and Russia)and the breakneck speed of their economic growth. However, thesevehicles have a role to play in more than just the emerging markets. Manycustomers in more mature car markets frequently see the benefits of theseconcepts and, often under financial pressure, make a conscious decision tobuy such a car.


It is important to note that such vehicles do not contain outdated tech-nology despite their moderate price tags. Frequently the safety,performance, consumption and variability standards they have to meetcan only be satisfied with enormous technological effort, even though amuch more level-headed approach is taken to the subject of new tech-nologies today. That is why the R&D machinery is still running at fullspeed. The goal is to adapt vehicles to the constantly and quickly changingeconomic, environmental and legal framework while never losing sight ofthe issue of customer acceptance.

Auto makers are therefore compelled to participate in the race to findthe best solutions for fuel consumption, weight, safety, comfort,performance, emissions, costs and alternative drive concepts. Thisinvolves a constantly high level of investment and effort, and those whoback down or give up will lose out. However, ‘being a part of it’ does notmean doing everything yourself. Only intelligently designed partnershipsand networks can make this complex world manageable and affordable.

Technology strategy is key

One crucial success factor is the ability to understand which are the areaswhere customers expect to see technological innovation that differentiatesone car from another, as far as their perception of the brand is concerned.These are the areas where the OEM must strive to excel, whereas in otherareas the industry standard may well suffice. Furthermore, auto makersmust be able to determine which competencies they themselves mustpossess in order to implement their defined technology strategy, andwhich can be outsourced to value chain partners. Without this knowledgeand a technology/resource strategy developed on this basis, the balancingact between functionality and costs can no longer be mastered.

As a result, the development of suitable technology strategies becomesthe key to success. Customers give auto makers plenty of leeway in thisrespect. They do not require 100 per cent of the technical content of avehicle to stem from a single brand. They have a focused perception of theelements and functions that are important to them. This provides thenecessary breathing space for cooperative ventures and for concentratingon brand-shaping technologies.

The aspect of global markets and requirements must also be taken intoaccount in this context. Auto makers are forced to harmonize thefrequently diverse requirements of multiple markets with their businesssystems, including the emerging markets with their entry-levelconcepts. What this means is that they must attain global scale by

Conclusion 365

exploiting the possibilities and the needs of the local markets.Decentralized R&D centres and partners as well as local production andsupplier partnerships are absolutely indispensable here. Localizedproducts (function, cost, design) with a strong global brand form thebasis of success in a global industry.

A compelling need to simplify

Diversity in vehicle portfolios has substantially increased among allOEMs in the past decade, and it continues to rise. Every imaginable nicheis being filled, and soon companies will be fighting over even the mostminute market potential. As a result, car makers are forced to simplify andaccelerate their development processes. They must also reduce devel-opment costs substantially, given that the money invested is now spreadand amortized over far fewer vehicles per type. Driven by these forces,some auto makers are working systematically and intensively to adaptand/or redesign their R&D structures, processes and strategies. Platformand modular strategies are often the result.

Besides a mastery of the technology itself, the actual organization oftechnology and vehicle development is becoming a core competency,often representing a crucial success factor. Convincing concepts arestrong levers of business success in this context.

Managing technological progress

The automobile in its current format, with a conventional combustionengine, is reaching its limits. Fossil fuel resources will be exhausted in thenear future. This puts the very foundations of the industry as a whole insevere jeopardy, and lawmakers as well as the automotive industry findthemselves under significant pressure.

The industry is being challenged to develop technologies that provide aprospective solution to the fuel dilemma. The big OEMs fully accept thatthey are compelled to innovate, this being the only way to safeguard thesurvival of the automotive industry. Moreover, some auto makers quicklyrealized that such substantial technological breakthroughs hold a certainamount of differentiation potential. They have thus pulled ahead withconcepts such as the hybrid engine, giving them high levels of positivepublic recognition, which is reflected in high sales figures. This, however,brought things to a head. The entire automotive industry realized thatthese developments are already being monitored by a public which has


been sensitized to high energy prices, and saw that they represent the keyto improved market positioning and increased success.

The race to come up with better solutions is on. Hybrid engines,BlueTec, fuel cells, hydrogen – there are many ways to attain substantialimprovements in consumption and emissions levels. The task now is todevelop them technologically. The automotive industry has pulled out allthe stops, and is working toward making the consequences of the auto-mobile more socially acceptable and more environmentally friendly. Thisis a milestone it will certainly reach.

Technology as an opportunity

An awareness and understanding of technology must extend far beyondresearch and development. Technology is an essential factor in the posi-tioning of a brand, as it increasingly determines product and brandstrategies, in addition to the focused technology strategies described above.

The repositioning of the Lexus in Europe, where it assumed the role ofinnovator in hybrid technology combined with localized design andcustomized sales and marketing initiatives, is an example that clearlyshows the opportunities this approach can yield. Mercedes-Benz is yetanother example. From its very beginnings, the brand has been a pioneerin the segment of ‘fast-running diesel engines’. Consequently, Mercedes-Benz is strongly committed to pushing the diesel drive concept in theUnited States. Mercedes’ ‘BlueTec’ technology, with its superiorconsumption and emissions performance, is at the heart of this initiative.It provides the technological basis to even undercut the extreme limits inplace in some US states, which will help diesel cars gain acceptance. As abrand, Mercedes will reap the benefits.

As both of these examples demonstrate, the concerted effort of alldepartments across the entire company is required to achieve such goals.How these processes are set up frequently determines whether the tech-nology and the company will be successful. Technology management issynonymous with brand management and value management. It is basedon a thorough understanding of customers and their expectations. Onlywhen technology is a priority issue for top management and an integralcomponent to be embedded in departmental strategies can all of thiscome together.

Conclusion 367

368 Index

IndexNB: page numbers in italic indicate figures For directives and regulations see European Union (EU) and legislation

42V vehicle power system 115–17, 126

acronymsABS: antilock braking systemEBIT: earnings before interest and tax ESP: electronic stability program NAFTA: North American Free Trade AreaNOx: nitrogen oxides OEM: original equipment manufacturerR&D: research and developmentSCR: selective catalytic reduction SUV: sport utility vehicle

ADAC AutoMarxX ratings 42AdBlue® 15, 125, 328 see also BLUETEC

and clean dieselAisin AW 96Aisin Seiki 96ALD 195Alfa Romeo 163Allianz Danner test 202–03AMDEC 200antilock braking system (ABS) 15, 106,

185, 220, 226, 235, 270 Asia(n) 43, 48, 50, 83, 93, 219, 234, 238,

306–07, 336, 351, 352–53, 362crisis (1998) 61cultures and long-term relationships 65OEMs 49, 51, 66

Audi 58, 109–10, 112, 125, 237100 TDI 237A8 112Electronics Venture 276and hybrid engine technology 125Q7 SUV 125Quattro 110

Auto Distribution 201–02automotive credit 195automotive industry

as role model 291–92

pioneers of 47–48, 48automotive industry, shifting balance of

power in 31–37and car makers/component

suppliers 34–36, 35, 36and customer segments 33–34and new suppliers 32, 32, 33and social/environmental issues 36–37,

37automotive industry and global

economy 3–24 see also Germanyglobal automotive industry 3–4

automotive industry and globalization challenge 46–48, 48, 49, 49–68

Japan and Korea: conquest of NorthAmerica and Europe 48–54

European markets 50–52, 52and new OEMS from China, India and

Eastern Europe 52–54North America 49–50, 50

new emerging markets, survival andsuccess in see emerging markets

automotive industry: winners and losers 38,38, 39–45

Chinese car industry 38–40, 40component suppliers and success

factors 44–45, 45top performers and low performers 40,

41, 42–44low performers, problems of 43–44top performers and success factors 42

automotive markets, global shifts in 26–31,27, 28, 29, 30, 31

Automotive Open Systems Architecture(AUTOSAR) 226–30, 239, 280,281, 281

innovative products for new marketsegments 228

quality, common goal of 227–28

shared market interests 228–30Automotive Research, Institute for (IFA) Automotive Research Center (FAW) 65, 254automotive semiconductor applications 288

Benz & CieAG 315Berger, R 42, 44Bharat Forge 64, 68, 334–44

and acquisitions 341–42and action 338–39background to 334–37and competitiveness 342–43and focus 338and full service provider capability 343and innovation 343scale and growth of 340–42and synergy 343–44and technology 339–42vision of 337–38

biofuel 19, 22–23and agricultural sectors 22biodiesel 23bioethanol 22and energy crops 22–23and raw materials market 23

BLUETEC and clean diesel 15, 125, 314–33and commercial vehicle

applications 327–30, 328, 330and E320 BLUETEC: first serial-

production passenger car 324–27,324, 325, 326

and emission regulations: passenger cars 317–19, 317, 318

and emission regulations: trucks 319,320

history of 314–16, 316and modular technology for passenger cars

320–23, 322, 323and outlook and future for diesel 330and roadmap for innovative powertrain

technologies 331–33, 332, 333and strategy for world’s cleanest

diesel 320–23BMW 8, 58, 74, 81, 100, 109, 111–12, 125,

140, 147, 159, 165, 208, 261, 274, 279Bank 207–08 and Brilliance 53Car IT 276customer satisfaction with 42and hybrid engine technology 125Mini 33sales revenues and EBIT 42X3 81World (delivery centre) 159

Bosch 66, 116, 205, 219–40, 261, 274Competence Centre for Hybrid

Systems 230

dominance in diesel injection systems 95Engineering 142history of 233–34and Mercedes A class 222Production System 232and subsidiary Blaupunkt 236

Bosch, R 233brand differentiation on basis of platform and

module strategies 241–51market fragmentation 241–51, 242, 243,

244, 245, 246, 247, 248, 250, 251brand(s) 107

core 243identity/image 34, 35, 82loyalty 57positioning 107, 109, 154premium 108values 132, 160, 243

Brazil 17, 22, 47, 54, 61, 63, 64, 234, 261–62breakdowns, automobile 72Brose Fahrzeugteile GmbH & Co.

KG 78–79, 79business models 286–89, 287, 288business relationships of OEMs and

component suppliers, deterioration in 91

by-wire technologies 115–16

capacity and competition 6–7capacity bottlenecks, unplugging 81car insurance premiums 151car lifecycle see sales and after-sales

challengecar magazines 105car makers: core competences that shape the

brand 73–75, 74, 75‘candidate blocks’ and influence on brand

promise 74defining future core competencies 75outsourcing and cost benefits 74–75

CARS 21 group 18–20 see alsolegislation

and environmental and safety regulations 18, 20

recommendations of 18–19and vehicle safety 19–20

car-related services 17car-sharing organizations 17case studies 217–344

Bharat Forge: emerging players fromemerging regions see Bharat Forge

BLUETEC and clean diesel 314–33 seealso main entry

brand differentiation 241–51 see alsomain entry

electronics and change in automotiveindustry 270–89 see also main entry

Index 369

General Motors in Europe 252–69 seealso main entry

partnership as model for success 219–40see also partnerships

sustainable success: OEMs and suppliers 290–313 see also mainentry

catalytic converters: DeNOx and SCR 326challenges

globalization 46–68, 350–55 see alsomain entry

market 146–70, 347–50 see also marketchallenge

sales 355–60 see also sales challengesales and after-sales 171–215technology 103–45, 363–67 see also

technology challengevalue chain 69–102value creation 361–63 see also value

creation challengeChevrolet 100, 259, 260, 266

Taho 100China 6, 7–8, 16, 26, 29, 29, 30, 32, 46, 47,

48, 50, 54, 58–60, 60, 61, 63–64, 66,73, 81, 82, 84, 87, 213, 219, 228, 236,238, 264, 269, 289, 291, 306, 308,336, 342, 348, 352, 353, 364 see alsoChinese car industry

as growth market 7–8 and Buick 57and cheap cars 67and Chery QQ 30, 65, 67 and domestic market 8 and five-year plan 8and Geely 46, 65, 67 and Hyundai 33and OEMs 29 and Rover 353 and value chain 29

China National Automotive IndustryCorporation 39

Chinese car industry 38–40, 151and growth of auto market 52–53Landwind SIV 66Nanjing Automobile 53, 66, 353progress of 29SAIC 53, 65, 66, 353

Chrysler 14, 46, 47, 101, 109, 157Citroën C1 99clean exhaust emissions technologies 14,

21–23Club of Rome 13, 347CO2 emissions 18, 19, 21–23, 327communication technology segments 119competition 6–7, 12–13, 151–52, 189–90,

191, 238competence centres 276

competence inhouse 283component suppliers 70, 77–78

focused on components or integration 75–79, 76, 77, 78, 79

HBPO 93–94, 94Siemens VDO and Magneti

Marelli 94–95, 95Concept Vehicle Jeep® 326conclusion 345–67 see also challenges and

globalization low performers, problems of 346–47market challenge 347–50 see also main

entrysales challenge 355–60 see also main

entrytechnology challenge 363–67 see also

main entrytop performers, success factors of 346value creation challenge 361–63 see also

main entrycore competence(s) 71–83, 145core strategy unit 140Covisint electronic procurement

platform 100cross-border synergies 158customer loyalty 33, 209, 209customer needs 155, 294, 349customer-focused technology and product

strategies 129, 130, 130–36aligning value chain with technology

strategy 135–36, 136and changes in customer

requirements 129–31generating customer-focused

innovations 133–34, 135transforming demand to brand-shaping

vehicle attributes 131–33, 132, 133customer-oriented technology

management 127, 127, 128, 129,129–44

customer-focused technology and productstrategies 129–36 see also mainentry

networking with external partners 140–44see also main entry

operational design, forms of 136–40 seealso main entry

customer relationship management (CRM) 156–57, 164

customer segmentation 33–34customer satisfaction 114–15, 115, 131,

166–67 index (CSI) 253–54

customer, understanding the 154–57CRM systems 156–67value-based strategies for 154–55, 155, 156

customers, accessing via sales 348

370 Index

customers, expectations and behaviour of 146–47, 148

Czech Republic/Kolin 64, 96, 99–100

Daewoo and Chevrolet brand 66Daewoo and Kia 53DaimlerChrysler 8, 34, 43, 52, 64, 70, 107,

115, 120, 125, 159, 261, 325–26, 325,326, 332

Bank 207–08buses 329and development of hybrid engine with

GM 100–01E320 125and offshoring R&D 64

DaimlerChrysler AG 220–21, 237dealer groups 161–62, 196–99, 197, 198,

210, 359–60Delphi 66, 68, 293–94

and Chapter 11 protection 293demo car segment 177, 177demographic trends 244Denso 96diesel 14–15, 228–29 see also BLUETEC

and clean dieselclean 15, 314–33globalization of 229and hybrid vehicles 21high pressure technology 119injection systems 95particulate filters 14, 119

diesel cars and market share 125–26 Direct Line 204digital tachographs 11Dodge Durango 101Dresdner Bank 208

earnings before interest and tax (EBIT) 42,295

Eastern Europe 9–10, 26, 32, 48, 55,83–85, 162, 170, 189, 219, 234,306–07, 308, 336, 362

economic cycles 16economy cars, demand for 219–20electronic and software development

cycles 141electronic control units (ECUs) 274electronic continuous damping control

(CDC) 267electronic stability program (ESP) 15, 106,

108, 220–22, 226, 236development of 220–21learning from example of 222and technological challenges 221–22

electronics 15, 72, 80–81, 113, 136, 237electronics and change in automotive

industry 270–89

complex mechanical to complexelectronic systems 270, 271, 272–75

competence and competition 275complexity, growth of 274, 275productivity and challenge 272, 273,

274convergence of electronics and car making

industry 275–77, 277, 278–79electronics suppliers, importance

of 277–78, 278, 279knowledge and business model-related

dependencies 283–86collaboration, new quality of 284–85,

285, 286new business models, need for 286–89,

287, 288systems integration 279–83

responsibility for 282–83standardization and

competition 280–81, 281, 282emerging markets 54–68

and challenges for OEMs and newcomers 56–61

diversity in regional markets 58–59first time buyers 57–58, 57, 58high fixed costs and operations lacking

critical mass 59–61, 60minimal brand loyalty 57–58price sensitivity 58–59, 59

demand volatility, exchange rate fluctuations and trade barriers 61

growing demand restricted to 54–56, 55,56

success strategies for establishedautomakers 61–65 see also mainentry

success strategies for newcomers 65–67see also main entry

sustained cost advantages in 55–56emissions 11, 37, 37, 228, 262, 317–19 see

also European Unionengineering service providers 66, 71, 80,

80, 81AVL 66EDAG 66, 71finding their focus 80, 80, 81Karmann 66, 71, 81Magna Steyr 71, 81Pininfarina 51, 66, 71

entry-level models 62–63environmental issues 36–37ESP: a successful partnership 220–22 see

also partnershipsEurodesign 174, 188, 188, 189, 203, 210,

356, 358Euro-NCAP 131, 356

crash test 121–22, 122, 126, 145

Index 371

European Commission (EC) 18, 22, 212European Parliament 18European Union (EU) 4, 8, 22, 318, 319, 360

Clean Air Directive 318directives 18–19, 37, 229E25 175, 210e-Safety program 222Euro 3 emissions standard for diesel 228Euro 4 standard 318, 319Euro 5 standard on particulate

emissions 229, 318, 319, 327

fast-fitters 202Fiat 43, 68, 70, 96financial institutions, captive and

non-captive 206–09captive banks: the German exception 207,

207, 208non-captives: market share in new growth

areas 209financial services 17, 151, 165, 192–96,

359 see also insuranceautomotive trends and change in credit

purchasing 194–95, 194, 195, 196banking services 207banks and leasing firms 17, 292coveted by non-automotive

players 192–93, 192, 193fleets/fleet management services 176–77,

194, 212, 214, 356–57Ford Motor Company 32, 43, 46, 47, 52,

68, 70, 100, 157, 163, 293, 350–51and hybrid engines 125

France 6, 84, 161, 164, 181, 191, 196,201–02, 204–05, 208, 211, 213, 356

fuel consumption 37, 228full-service providers/dedicated production

service providers 81–82and capacity bottlenecks, unplugging 81and new growth markets 82

General Motors (GM) 32, 39–40, 40, 40,43, 46, 47, 48, 52, 57–58, 68, 70, 157,163, 167, 235, 293, 350–51 see alsoOpel and Saab

Astra 253, 254, 260, 265, 268Cadillac 163, 252–53, 259, 260, 264, 349Corsa 266Corvette 163, 264 Daewoo 260and design and engineering 264and development of hybrid engine with

DaimlerChrysler 100–01, 293and diesel 125and European Design Center,

Rüsselheim 257–58, 263, 264and Fiat powertrain joint venture 125, 261

and hybrid engine technology 125,261–62

and HydroGen3 268Hummer 163, 264in Sweden 259, 260, 264 Meriva 253, 265and Red X Team 256and Rüsselheim Opel factory 255share in US market 43SUV Graphyte 261Tigra Twin Top 265, 268 Vauxhall 259, 264Vectra 253Zafira 253, 260, 262, 265

General Motors in Europe 252–69customer and dealer satisfaction 254–55design expertise 257–59design trend-setter Europe 268electronics, smart use of 262–63employee motivation and success 256future-oriented approach 269 growth above industry trends 263–64new market challenges 265–66overcoming weak economy 264–65portfolio positioning 259–60propulsion and hybrid technology 261–62quality 257single-company strategy 266–68specialists and international knowledge-

sharing 255–56world-class cars: quality and product

initiative 253–54German Association of the Automotive

Industry (VDA) 227‘Quality, the Foundation for Joint Success’

agreement 227, 231German automotive industry 4–7, 9–10,

13–17, 20–24, 150, 159–60, 161, 170,219, 223, 222, 225, 228, 233–34, 239,252–53, 289

and automobile breakdowns 72and biofuels 20–23and car buyers 147and competition and capacity 6–7export strategy of 9–10and flex fuel vehicles 22and future challenges 23–24global business location strategy of 9–10and road safety 20and sales 152success strategies of 13–17wholesalers 201

German market, the 10–11, 151commercial vehicle segment, growth

of 10–11for diesel vehicles 14

German supply industry 11–13

372 Index

challenges for 12–13and clean diesel 15and financial/car-related services 17and outsourcing/partnerships 16and technology leadership 12, 15

Germany 4–17, 20–24, 79, 84, 118, 180,181, 191, 204, 211, 213, 229, 235,310, 318, 356 see also German automotive industry; German marketand German supply industry

ADAC (automobile association) 113, 254as business location 4–6and banks 151, 208business model 6GDV insurance association 151and German Civil Code (HGB) 160KBS Federal Motor Vehicle Office 72and new market opportunities 6and Pforzheim 2004 wage agreement 5and production sites 9Weller Group 161–62

global business location strategy 9–10global market(s) 15, 47 see also automotive

markets, global shifts inand biofuels 22for premium products 15

global sourcing 64globalization 6–7, 47–48, 64, 350–55, 290,

292, 293 see also see automotiveindustry and globalization challenge

and Asian automotive industry 352–54and changing times 47and competition and key success

factors 354–55driven adaptation processes 345and global expansion 351–52

Goldman Sachs 114green engine technologies 123

Hella Behr Plastic Omnium (HBPO) 93–94,94, 205

Honda 97, 100, 114, 124hybrid engine technology 119, 123,

124–25, 230, 261–62, 366Hyundai 33, 50, 52, 63, 64, 66, 67, 83, 351hub models 158hubs 169–70

IAM repairers/wholesalers: technology challenge 199–202

repair level: consolidation towards affiliated networks 199–200, 200

wholesale level: consolidation towardslarge buying groups 201–02, 201

iDrive system 42, 111–12India(n) 6, 7–8, 16, 17, 26, 32, 33, 39, 54,

58, 63–64, 66, 73, 81, 82, 84, 213,

219, 228, 236, 238, 269, 335–36, 348,364

as growth market 7–8car makers 151engineering industry 337and global IT supremacy 8growth of auto market 52–53low labour costs 336–37and Mahindra 53

Infineon 285information technology (IT) 111

and software for car makers 276–77insurance 17, 151, 202–05 integrated chassis control (ICC) 267intellectual property, safeguarding 64–65International Technical Development Center

(ITDC) Rüsselsheim 257, 265internet and private trading 152in-vehicle technology 80–81Italy 51, 84, 189, 211

Jaguar 34, 43, 109Japan 6, 8, 11, 26, 46, 47, 49, 53, 54, 66,

96, 105, 170, 213, 225, 230, 235, 238,291, 351

and hybrid engine technology 123and keiretsu(s) 96–97, 97, 98

Japanese 46, 49, 66automotive industry 32, 39, 44, 234–35,

351–53brands 50supplier (Zexel) 234

JD Power & Associates 131, 166–67, 253,268, 356

Jeep Grand Cherokee 81, 325joint ventures 142

Kia 50, 52, 53, 83, 351Korea(n) 6, 8, 46, 47, 51, 53, 66, 225, 235,

260, 289, 291, 351–53cars/brands 39, 49, 50car manufacturers 32, 151, 234–35

Kroymans Group 163, 167, 349

labour cost savings 55lean management principle 297lean retailing 292legislation 18–19 see also European Union

(EU)Block Exemption Regulation 151–52,

160, 165, 173–74, 186, 198, 210Design Protection Regulation 152ECE regulations 18–19

Lexus 50–51liability 282location decisions 89logistical costs 89

Index 373

low-labour-cost locations and survival 87–90, 336–37

and detailed location plan 90production location, choosing 88–89, 88,

89products, choosing 87, 87, 88

low-pollutant vehicles 11

Machine that Changed the World, The 13,347

macroeconomic trends 131Magna Innovative Lightweight Auto (MILA)

concept car 309, 310Magna International 294–313, 295, 296,

312as example of sustainable growth 294and active portfolio management 298–99and corporate development 296–97corporate constitution of 302, 303–04decentralized organizational structure

of 300, 301and entrepreneurship 301–02employees’ charter of 304, 304–05group structure of 298, 298, 299growth strategy of 297–98, 307, 307–12

broadening customer base 308capitalizing on OEM outsourcing

trend 310–11, 311, 312development of new markets 308innovations and technical

progress 308–09, 310operating principles of 305–06

Magna Steyr 296, 298, 299Production System (MSPS) 312

Magna Powertrain 298, 299Magneti Marelli 94–95, 95, 96 see also Fiat

and Siemens VDOmarket challenge 347–50

controlling sales channel 350conventional sales systems, overcoming

limitations of 349–50customer needs, identifying and

understanding 349market challenge and strategic

control 146–70competition outside new car

market 151–52competitive pressure 150–51, 150customer, understanding the 154–57 see

also main entrycustomers: expectations and

behaviour 146–47, 148offers and costs, manufacturers’ approach

to 147–49, 149, 150sales activities as key to success 152–53,

153

sales: power play and control 161–67 seealso main entry

sales systems, overcoming limitations of 157–60 see also main entry

separate tiers to single network 167–70collaboration with suppliers/

dealers 168–69from static multi-tiered model to

dynamic network 169–70outlook 170

market research institutes 131markets 21, 93, 219, 230, 306–07

global 15growth of 7–8, 17, 82liberalization of 12niche 33, 77triad 26, 33, 53, 61, 82, 84, 103, 105

Mercedes-Benz 51, 58, 62, 74, 101, 109,114, 124, 147, 148, 234, 314–16, 316,317–19, 331

bionic car 324, 324BlueTec 367buses 329, 330CLK 81S class 112, 120–21, 237

Mini 33, 109, 154–55Mitsubishi 43, 44module and system suppliers, growth

opportunities for 82, 83, 83module strategy 249, 250multi-brand sales 162–64multi-brand strategy 243, 250

network management 128network restructuring 158networking with external partners 140–44

and brand-shaping value chain elements 141–42

and competences and competitive capabilities 142, 143

from hierarchies to genuine partnerships 143–44, 144

and outsourcing of value chain elements 141

new cars fleets 176–77, 176, 177full mobility service solutions 178, 178market and changing demand 356–57product to mobility 176–78

niche markets/products 33, 77Nissan 51, 97, 114, 125

Infinity 51nitrogen oxides (NOx) 15, 317, 318–19,

320, 327non-governmental organizations

(NGOs) 18

374 Index

North America 54, 93, 101, 225, 238, 293,342, 351

North American Free Trade Area (NAFTA) 9

Offshore Local Attractiveness Index (A KKearney, 2004) 337

offshoring 55, 84Opel 67, 252, 253–55, 256, 258, 259, 260,

263–66, 267, 268operational design, forms of 128, 136–37,

137, 138–40 component-oriented development organi-

zations drive complexity 137functional teams reduce

complexity 137–38function-oriented development

organizations guarantee customerfocus 138, 139, 140

outsourcing 12, 16, 75, 210, 310

particulate matter (PM) 14, 37, 119, 229,317, 318–19

partnership(s) 219–40 and AUTOSAR see Automotive Open

Systems Architecture (AUTOSAR)and cost-effective structures and processes

230–33and balancing innovation and cost lead-

ership 231–32and importance of geographical

proximity 231and mix of high-cost and low-cost

countries 232–33and process optimization 232

and ESP 220–22 see also electronicstability program (ESP)

and global change 238–40and joint responses to future

challenges 239–40and trust 240

independence and responsibility in 223–37

competence and broad footing supportindependence 224–25

inequality of power 224and international presence 233–36

and Bosch 233–34, 236and global responses to local

requirements 235and shifting growth regions 234–35

and long-term perspective 236–37and need for stamina/perseverance 237and technological leadership, common

goal of 225–26suppliers and responsibilities 226

Patterns of Success for AutomotiveComponent Suppliers 44

peak-shaving plant 311, 311, 312Peugeot 37, 99

107 99and diesel particle filters 37

political framework: CARS 21 group 18–19 see also CARS 21group and legislation

Porsche 81, 109, 125, 162, 276, 292, 293Boxster 81Cayenne SUV and hybrid engines 125,

293Engineering Group 276

platform strategy 246–48, 247, 248, 249premium vehicle brands 109production sites 9–10, 55, 83–91, 258–59,

351Production Technology, Fraunhofer Institute

for 255

quality promotion and assurance 256

R&D 5, 7, 8, 15, 21, 24, 44, 61, 107, 144,226, 308, 344, 345, 351, 354, 261,362, 364, 366

global networks 64Renault 19, 121–22, 145, 181, 191, 203

Clio 181design to cost approach 63Laguna 121

Renault/Nissan: Dacia Logan 53, 63, 151 repair and service 182–87, 359

car pool: six- to nine-year-old segment 185, 185, 186

car technology: threat or opportunity? 186, 186, 187

customer demand for reliability/satisfaction 182–85, 183, 184

return on capital employed (ROCE) 44, 75,172, 172, 193

return on equity (ROE) 152Roland Berger Strategy Consultants 67, 77,

85, 113, 152–53, 154, 162, 271, 354RB Profiler 154, 155

Rover 53, 66, 353Russia 54, 64, 66, 73, 82, 87, 364

Saab 109, 253, 258, 259, 260, 261, 264–65,268

BioPower 261Brand Center, Trollhätten 258–59Technical Development Center,

Trollhätten 265safety features 15, 106, 119

ABS 15, 106, 185, 220, 226, 235, 270

Index 375

airbags 15, 51, 106, 108, 270belt warning indicators 20ISOFIX child restraint systems 20passenger protection systems 108

sales and after-sales challenge 171–215 acceleration of change, factors

in 173–74automotive value chain during car

lifecycle 172, 172, 173capture of value along car

lifecycle 211–15fully captive scenario 211–12fully non-captive scenario 212–13retail scenario 213striking the balance 213–15

demand shifts and redefining market rules 176–96

new cars: product to mobility 176–78see also new cars

repair and service 182–87 see alsomain entry

spare parts 187–91 see also mainentry

used cars 179–82 see also main entry‘user chooser’ business model 179

financial services challenge 192–96 seealso financial services

threats and opportunities for marketplayers 175–76

threats/opportunities and new challenges 196–210

dealer groups: relationship challenge 196–99, 197, 198 see alsodealer groups

financial institutions, captive and non-captive 206–09 see also mainentry

IAM repairers/wholesalers: technology challenge see main entry

insurers: the influential challenge 202–05, 205

OEMs: captive business model challenge 209, 209, 210

parts suppliers: market access challenge 205–06, 206

sales challenge 355–60 dealer groups, importance of 359–60financial services as source of

income 359improved service 358new car market and changing demand

structures 356–57original spare parts and competitive

pressure 358repair shops and tougher

competition 359used car market: setting the lever 357

sales: power play and control 161–67auto makers 164, 164, 165dealers 161–64new players 165partnerships 166–67

sales systems, overcoming limitations of 157–60

and optimization programmes, limitedsuccess of 159–60

and potential for improvement 157–58,158, 159

segmentation 33–34, 93, 219selective catalytic reduction (SCR) 14–15,

320Schuh, Prof Dr G 255Seger, K 109Siemens VDO 66, 94–95, 95 see also

Magneti MarelliSkoda 8Slovakia 64small and medium-sized enterprises 12,

285Smart car 34software 136

architecture 280development process 113

South Africa 61, 63South America 26Spain 84, 161, 189, 208, 211, 356, 358spare parts 187–91, 358

captive parts/accident-driven market 187–88, 188, 189

wholesaling and competition 189–90,190, 191

Steyr-Daimler-Puch 295, 296strategic alliances 94–95, 293strategies

expansion 353export 9–10module 249, 250multi-brand 163–64, 243, 250platform 246–48, 247, 248, 249success 13–15, 61–65technology/product 127–28, 135value-based 154value chain 140

studies/surveys Cap Gemini Car Online Study (2005) 42on BlueTec® exhaust treatment

(TÜV-Nord) 328on car manufacturers and automotive

suppliers (RWTH) 254on customer satisfaction 166–67on electronics 113on electronics value and suppliers/car

makers (McKinsey) 277on export strategies 67

376 Index

on India-based automotive componentmanufacture (McKinsey) 336

on low-labour-cost locations 85on multi-brand sales 162on patterns of success in component

supply industry 77on process management in retail industry

(McKinsey) 292success strategies for established

automakers 61–65 developing low-cost competencies 62–63global R&D, production and sourcing

system 63–64globalizing mangement structures and

personnel development 65local market requirements, understanding

and meeting 61–62safeguarding know-how 64–65

success strategies for newcomers 65–67developing autonomous technology

competences 66–67developing independent brands 66developing products fit for global

market 66–67implementing export strategies 67

sustainable success: OEMs and suppliers 290–313 see also MagnaInternational

and automotive industry as role model 291–92

and future of the industry 306–07system suppliers 142systems integration 279–80, 282–83

Tata 46, 53, 65, 66technology challenge 363–67

managing technological progress 366–67progress or pitfall 103–45 see also

customer-oriented technologymanagement and technology development

simplification 366strategy as key 365–66technology as opportunity 367

technology development 105–26 see alsotechnology development andcustomer

and ecology, safety and convenience 119and focus on customer 119–26, 122, 124from demand to value 117–18, 118in transition 105–10

and competitive pressure 105–06,106, 107

emotion and innovation 109–10innovation as standard 107–08, 108

without customer focus 110–17

failure, reasons for 110–13, 111, 112mature technologies 113–15, 114, 115non-establishment of

technologies 115, 116, 116–17Thatcham 174, 205, 356tiger economies (Asian) 26, 27Toyota 32, 42, 46, 49, 52, 96, 97, 98–99,

100, 114–15, 123–25, 131, 166–67,228, 230, 350

and business relationships with componentsuppliers 96

Aygo 99compared with GM 39–40, 40and hybrid engine technology 123, 126and joint ventures 96and key customer opinion leaders 124Lexus/Lexus RX400h 123, 124, 145plant with PSA in Kolin (CR) 96, 99–100Prius 33, 37, 123and PSA Peugeot-Citröen 293

triad markets 26, 33, 53, 61, 82, 84, 103,105

unique selling points (USPs) 35, 169, 282United States of America (USA) 11, 21, 26,

32, 51–52, 67, 105, 158, 213, 222,229, 234, 234–35, 283, 348

used cars 179–82and creation of vicious circle 180–82and ‘nearly new car’ system 179–80and professionalism in management 180,

181and setting the lever 357

value chain 35, 128, 135–36, 167, 215, 276,287, 287, 288, 309

strategies 140value chain automotive, paradigm shift

in 272, 274value chain breakdown: focus on core

competence 71–83 see also individual subject entries

car makers: focused on core competences that shape the brand 73–75

component suppliers: focused on components or integration 75–79

engineering service providers: findingtheir focus 80–81

full-service providers/dedicatedproduction service providers 81–82

module and system suppliers, growthopportunities for 82–83, 83

value chain: business model and networking 91–92, 92–101

closer collaboration, need for 101

Index 377

collaboration and cross-shareholdings:OEMs and component suppliers(Japan’s keiretsus) 96–97, 96, 97

collaboration between OEMs andcomponent suppliers without cross-shareholdings: Toyota 98, 98, 99

collaboration between OEMs:DaimlerChyrsler, GM and BMW 100–01

joint ventures between componentsuppliers: HBPO 93–94, 94

joint ventures between OEMs: ToyotaPeugeot Citroën Automobile (TPCA) 99–100

strategic alliances between componentsuppliers: Siemens VDO and MagnetiMarelli 94–95, 95

value chain challenge: networks 69, 69,70–71, 71, 72–102

and key challenges 102value chain: footprint, growing pressure on

existing locations 83–91 low-labour-cost locations and

survival 85–90 see also main entrysolutions for locations in countries with

high labour costs 90, 91value chain, key levers of 70, 71value creation 12

business model 363challenge 361–63physical service delivery 362–63roles in 361–62

VDA and Ad Blue® 15vehicle model cycles 113, 114, 141vehicle safety 19–20, 37vehicle types

4x4s 16 compact 15, 16 convertibles 16

cost of 17cross-over models 148flex fuel 22hybrid 21low-pollutant 11minivans 27, 105MPVs 44, 105niche 16, 81–82, 265pick-ups 27, 49premium 17roadsters 265sport utility (SUV) 15, 16, 27, 34, 44,

49, 105, 148, 252, 260, 265supermini 16 vans 49, 105

Verheugen, G 18Volkswagen 14, 43, 44, 51, 52, 64, 81, 83,

110, 125, 147–48, 151, 165, 234, 235,292, 293

Beetle 61Fox 30, 62 Golf/IV/V/City 61, 62, 110–111, 148Jetta 62 Phaeton 34, 110, 147Polo 62

Volkswagen Financial Services 195, 207,207, 208

Volvo 109

wages, hourly 55–56, 56Weber, T 120Western Europe 26, 84, 159Womach, J P; Jones, D T, and Ross, D 13,

347World Trade Organization (WTO) 63

ZVEI: German electrical engineering and electronics industry association 279

378 Index

bernd gottschalk, ralf kalmbach mastering automotive challenges 2007

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